Could sidechains be the enabler of “semi-decentralised” Bitcoin products and services?An important paper was published this week: If you’ve followed Bitcoin for any time, you’ll know this is a seriously eminent group of authors It describes a way to build “pegged sidechains”.Sidechains themselves are not new – the idea, and how to build them, has been discussed for some time and the key breakthrough was outlined earlier in the year.But this paper gives more detail on the concept and has attracted a lot of comment.But what are they?And why should anybody care?The key to understanding most innovations in the Bitcoin space is to make sure you have the right mental model for how Bitcoin itself works.It turns out that most people I speak to don’t really understand how it works and, as a result, have a faulty mental model.To help with this, I came up with an analogy for Bitcoin earlier in the year, based on thinking of Bitcoin “unspent transaction outputs” as parcels of land.

Some people hated the analogy but I still think it has value 🙂 But in this piece, I’ll skip the analogy and net it down to the basics.First, clear your head of anything related to money, currency or payments.And clear your head of the word ledger, too.The mind-bending secret of Bitcoin is that there actually isn’t a ledger!The only data structures that matter are transactions and blocks of transactions.And it’s important to get this clear in your head if sidechains are going to make sense.bitcoin is crashingWhen you “move” Bitcoins, what you’re saying is: The critical three parts of a Bitcoin transaction There are several important points here: Keep saying the three steps to yourself until they’re etched on your memory!ethereal island wikiSo the “grammar” of a Bitcoin transaction is clear:   “Here are the coins I want to move, here’s the proof I’m entitled to and here’s what the recipient must do, in turn, if they want to spend them”.china dominate bitcoin

This transaction is published into the network, it will eventually find its way into a block and, after other blocks have been built on top, everybody can be pretty sure it won’t be reversed and the world moves on.What more do you need?This three-part structure to a Bitcoin transaction works well and it turns out that you can do some really interesting things with it.For example, you can use the “not-entirely fungible” feature to “tag” coins.This is the basis of the “Colored Coins” and “Smart Property” worlds.bitcoin expo londonBut there are problems, such as: Bitcoin’s block interval is ten minutes so it takes about five ten minutes on average for a new transaction to find its way into a block, even if it pays a high fee.bitcoin sportsbook bonusThis is too slow for some people so they have experimented with alternative cryptocurrencies, based on the Bitcoin code-base, which employ quicker block intervals   [UPDATED 2014-10-27 to correct my embarrassing misunderstanding of mathematics…] The “three-part” transaction structure is very general but it only allows you to transfer ownership of Bitcoins.bitcoin en baisse

Some people would like to transmit richer forms of information across these sorts of systems.For example, a decentralized exchange needs a way for participants to place orders.Projects such as Mastercoin, Counterparty, NXT and others either build layers on top of Bitcoin or use entirely different codebases to achieve their goals.I said above that you can build sophisticated rules into Bitcoin transactions to specify how ownership is proved.However, the Bitcoin scripting language is deliberately limited and many ideas in the Smart Contracts space are difficult or impossible to implement.new zealand bitcoin regulationSo projects such as Ethereum are building an entirely new infrastructure to explore these ideas It doesn’t matter if you’re moving $1bn or 0.01c across the Bitcoin network, you get the same security guarantees.bitcoin something awful

And you pay for this in fees and time.What if you were prepared to trade safety for speed?Today, your only real option is to send the coins to a centralized wallet provider, whom you must trust not to lose or steal your coins.You can then do all the transactions you like on their books, with their other customers and you never need touch the Bitcoin blockchain.But now you lose all the benefits of a decentralized value-transfer network.Now, making experimental or rapid changes to Bitcoin is very risky and so change happens slowly.buy litecoin rigSo if the one-size-fits-all architecture of Bitcoin doesn’t suit a particular use-case, you have a problem.You either have to use an entirely different cryptocurrency (or build one!).Or you have to use (or build) a centralized service, which brings new risks.This is very inconvenient.It creates risk and fragmentation and slows the build-out of products, services and infrastructure.

But there’s an interesting observation we can make.From the perspective of the Bitcoin network, Circle is a black box.You had some coins… you sent them to a specific address…   some stuff happened that Bitcoin couldn’t see….And at some point later, you had control of some coins again.It’s as if those coins had been moved from Bitcoin to somewhere else and then back again.The key idea behind the sidechains concept is: What if you could send Bitcoins not only to individuals, addresses and centralized services but to other blockchains?Imagine there is a Bitcoin-like system out there that you’d like to use.Perhaps it’s litecoin or ethereum or perhaps it’s something brand new.Maybe it has a faster block confirmation interval and a richer scripting language.The point is: you’d like to use it but would rather not have to go through the risk and effort of buying the native tokens for that platform.You have Bitcoins already.Why can’t you use them?The sidechains ideas is this: Sidechains use the standard bitcoin “three-step” transaction to immobilise bitcoins whilst they’re “on” the sidechain So, to repeat, we’ve used standard Bitcoin transaction functionality to move coins out of reach and we then prove to a second, unrelated chain, that we’ve done this.

And when we’re done, whoever owns them on the sidechain can do the same thing and send them back to the bitcoin network.So developers get the opportunity to experiment with different types of cryptocurrency rules without needing to create their own currency.Step back from the details for moment and consider what’s been described.We now have a way to move coins from Bitcoin onto another platform (a sidechain) and move them back again.That’s pretty much what we do when we move them to a wallet platform or an exchange.The difference is that the “platform” they’ve been moved to is also a blockchain… so it has the possibility of decentralised security, visibility and to gain from other innovation in this space.For example, one could imagine a sidechain that is “mined” only by one company.That would be identical to a single-company wallet, but with full visibility of transactions.Going further, you could imagine a sidechain that is mined by 100 different companies in a loose federation.