Sidechains: weaving a network of blockchains with Bitcoin

Hive eventFebruary 17, 2016

Adam Back, PhD

Bitcoin vs FiatBitcoin: virtual commodity- creation via gold-like virtual mining - supply limited mathematically- electronic but with real-time assay- cash-like bearer/fast final settlement- same speed & low cost globally- digital scarcity- download wallet software & use

Fiat: USD, EUR etc- prudence of central bank- QE, inflation - hyperinflation, capital controls- often slow settlement wires, cards- slow & expensive internationally- political scarcity / moral hazard- account & identity based

November 20152

The Blockchain is a Ledger

Source: bitcoin.org

November 20153

Traditional Ledgers

Closed Systems

Hacked & Accessed

High Transaction Fees Laborious Verifications

Slow CentralizedNovember 2015

4

Bitcoin advantages

Bitcoin- trustless: machine verifiable integrity- automated real-time audit- open network- secure open protocol- used over open internet- permissionless, like internet- fast pace of innovation- low fees

Banks- trust: reputation & integrity of issuer- annual manual audit- private network- insecure protocol based on trust- used over leased lines / VPN- need permission from competition- high barrier to entry- high fees

November 20155

Blockchain Ledgers

Open Sourced

Cryptographically Secure

Network Verified Beyond Borders

Fast Decentralized

November 20156

blockchain to sidechain

Blockchain- Bitcoin uses distributed ledger called a blockchain- applications for wider finance: shares, bonds, derivatives, structured products- currently slow reconciliation based settlement T+2 etc- current blockchain is bitcoin only- can extend blockchain to support wider applications: “sidechain”- bitcoin connected chain with mechanism to move assets between chains- think of sidechain as internetworking protocol for blockchain tracked assets- defines interoperability and network transportability of electronic assets

November 20157

Blockchain Challenges

Limited scalability & cautious development

7 transaction/second limit

Bitcoin only

Fragmentation resulting from off-blockchain transactions & alt-coins

November 20158

Solution: Extend Bitcoin Innovation via Sidechains

about sidechains

Sidechains- can extend blockchain to support wider applications: “sidechain”- bitcoin connected chain with mechanism to move assets between chains- think of sidechain as internetworking protocol for blockchain tracked assets- defines interoperability and network transportability of electronic assets- sidechain extends Bitcoin protocol to track issued assets (native coloring)

November 201510

sidechains how

Bitcoinsuspend bitcoin ->( coin frozen … )proof returned <-( maturity period … )[potential fraud proof]reanimated bitcoin( coin in use again … )

Sidechain-> proof of suspend allows move( sidechain use.. )-> return coin

November 201511

supporting p2p sidechains

Sidechains- need new op-codes to suspend and verify compact return proof- soft-forkable- compact proof (with skiplist using lucky extra work)- ½ time get extra 0 bit, ¼ get two extra 0 bit, allow further skip- makes PoW preserving compact proof membership in same chain

November 201512

sidechain security model

Sidechains security- incentive from bitcoin fees- (optional) consensus rule to peg ½ of subsidy directly to sidechain- have to maintain hash lead for maturity period (day)- fraud proofs prevent precomputation- different model but somewhat analogous to main chain:- ... this level of hostile hash power could revert exchange deposits- hybrid model with federated signer & hashrate (40%:60%)

November 201513

major version usecase

software upgrade- can use a sidechain to do major refactoring on a live beta- migrate coins after it becomes goes from beta to stable- users who need features early can use the beta- safer than making invasive changes on live chain- faster development cycle

November 201514

experimental chain usecase

do other interesting things- replace chain logic (ethereum script but with bitcoin: rootstock)- zerocash- snarks- hivemind (prediction betting)- elements alpha sidechain- … http://elementsproject.org- different chain parameters (block-size <- current hot topic)- different block intervals- but primarily an extension mechanism not a scaling solution- lightning, duplex payment channels layer 2 are scaling

November 201515

liquid sidechain

interexchange settlement- deposit coins into liquid- move coins faster for arbitrage, market making, virtual order book- later add support for USD, EUR with exchange or separate issuer- > 12 bitcoin exchanges coming soon- confidential transactions default on (prevent front running)

November 201516

Blockchain without BitcoinBlockchain- mining security (or hybrid)- trustless interchain transfer- automated trust- secure tokenized asset- independently validated- open, permissionless- necessarily publicly auditable- virtual narrow AI

Federated Chain- trust group of banks- legal contract between ledgers- manual cross certification- IOU from controllers of ledger- validity assertion by ledger owners- closed, permissioned- maybe publicly auditable- status quo + cross-checks

November 201517

Mining sidechains

Mining is about immutability, permanent globally consistent record- banks: immutable storage based on trust, brand, auditors- federated sidechain: threshold of signers, trust, tamper resistance- merge-mined sidechain: Bitcoin fees for miners to secure chain- hybrid: federated signers plus miners in some ratio (40%:60%)

November 201518

Permissionlessness matters

Permissionless Innovation- Internet’s permissionless global platform credited with wave of innovation - permissioned chains are good, but data integrity tools for closed networks- incumbents have incentives to deny permission- high barrier to entry due to complexity and regulation- innovation path likely involve forward-looking institutions- and direct competition in poorly serviced use-cases

November 201519

Prevention over deterrence

Prevention over deterrence- regulations are in many cases rooted in consumer protection - ..from last century stock scams, bank runs, unscrupulous actors- backdrop fairly regular fines for bending rules, schemes in finance/banking- but regulation is friction, barrier to entry, which results in high fees & marginsCase for non-custodial low regulation- business prevented from spending client funds, prop trading with client funds- non-custodian concept is touched on in some bitcoin regulations- if whole system - reduces systemic risk

November 201520

regulators should like blockchains

Case for non-custodial low regulation- business prevented from spending client funds, prop trading with client funds- non-custodian concept is touched on in some bitcoin regulations- if whole system moved to blockchain model, real-time assurances of solvency- capital requirements and leverage requirements- reduces systemic risk

November 201521

Scale with lightning

Lightning cache layer- scale is also achievable via lightning- a new blockchain cache layer- faster, lower cost, higher scale (1,000 - 10,000 more TPS)- not broadcast, routed like TCP

November 201522

blockchain smart-contracts

Smart-contracts- each Bitcoin payment is technically a smart-contract- a smart-contract is small program that has custody of funds- cause the program to return true, and you can take the funds- normal contract: IF ( signature( pub-key ) ) THEN true- but it can be a general programming language- implement derivative in smart-contract, structured product etc- program executed by the network- behaves as-if executed by perfectly honest narrow AI- reality is simpler: verified by all validators & miners

November 201523

confidentiality - virtual private chain

confidentiality in public ledgers: virtual private chain- blockchain ledger is really public, maybe too public!- confidential transactions - we can encrypt values and still have public audit- need reasonable level of commercial confidentiality or hesitant to use- so without confidentiality may never see adoption and benefits- analog of VPN - use public internet but encrypt sensitive information- technically using Zero Knowledge Proofs and Homomorphic Encryption- only sender & recipient (and optionally auditor) know values

November 201524

virtual (narrow AI) enforced business logicfiduciary code- blockchain functions as a perfectly honest virtual narrow AI- in reality simply by everyone checking, in future via SNARKs maybe- new programming model of moving business logic into blockchain execution- replace trusted third party, contract fullfillment by blockchain execution- replace issuer trust with self-executing bearer instruments

November 201525

blockchain implications

implications of programmable money- can replace trusted issuer with trusted instrument- can verify the instrument - small template smart-contract- cost of many financial instruments undercut by competition- current barrier to entry being trust of issuer- improve systemic risk: provide society with real-time audited assurances- re-architect financial networks using blockchain

November 201526

blockchain summary

summary of blockchain implications- reduced reliance on third party trust via real time audit- improved integrity and lower systemic risk for financial system- smart-contracts replacing legal contracts and reliance on underwriter- virtual private chains / confidential transactions - regaining confidentiality- scale via lightning protocol- move companies onto blockchain: income, expenses, dividends, shares, accounts- central banks issue electronic money into blockchain networks- smart monetary policy possible

November 201527

Growth of the Hashrate

9 petahash

350 petahash39.8

x

November 201528

Bitcoin VC Outpacing Early ‘Net VC

November 201529

• Total VC investment in cryptocurrency companies as of March 2015 was $832m

• Bitcoin VC investment projected to continue to outpace early-stage investments in the Internet

Source: Coindesk, State of Bitcoin Q2 2015, 07/16/15