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The Hive Think Tank: Sidechains by Adam Back, President of Blockstream

Over the last couple of years, blockchains have captured a significant mindshare of innovation in financial services, industrial Internet and digital commerce industries. The scope of applications of blockchain as a platform has long surpassed that of its origins in Bitcoin as a cryptocurrency technology. However, none of the new blockchain platforms has been able to reach Bitcoin's levels of scale, security and global reach. There have also been no standards to interoperate between different blockchain platforms for exchange of assets. In order to address these challenges, Sidechains were created as cryptographic systems that securely orchestrate exchange of information between different blockchains by leveraging the scale & maturity of the Bitcoin network. Sidechains are weaving a network of diverse blockchains to bring interoperability and Bitcoin’s scale & maturity. In this talk, Adam Back will talk about its role in building the decentralized world of blockchains.

The Hive Think Tank: Sidechains by Adam Back, President of Blockstream

  1. 1. Sidechains: weaving a network of blockchains with Bitcoin Hive event February 17, 2016 Adam Back, PhD
  2. 2. Bitcoin vs Fiat Bitcoin: 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 2015 2
  3. 3. The Blockchain is a Ledger Source: bitcoin.org November 2015 3
  4. 4. Traditional Ledgers Closed Systems Hacked & Accessed High Transaction Fees Laborious Verifications Slow Centralized November 2015 4
  5. 5. 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 2015 5
  6. 6. Blockchain Ledgers Open Sourced Cryptographically Secure Network Verified Beyond Borders Fast Decentralized November 2015 6
  7. 7. 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 2015 7
  8. 8. Blockchain Challenges Limited scalability & cautious development 7 transaction/second limit Bitcoin only Fragmentation resulting from off-blockchain transactions & alt-coins November 2015 8
  9. 9. Solution: Extend Bitcoin Innovation via Sidechains
  10. 10. 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 2015 10
  11. 11. sidechains how Bitcoin suspend 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 2015 11
  12. 12. 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 2015 12
  13. 13. 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 2015 13
  14. 14. 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 2015 14
  15. 15. 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 2015 15
  16. 16. 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 2015 16
  17. 17. Blockchain without Bitcoin Blockchain - 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 2015 17
  18. 18. 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 2015 18
  19. 19. 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 2015 19
  20. 20. 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 & margins 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 - reduces systemic risk November 2015 20
  21. 21. 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 2015 21
  22. 22. 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 2015 22
  23. 23. 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 2015 23
  24. 24. 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 2015 24
  25. 25. virtual (narrow AI) enforced business logic fiduciary 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 2015 25
  26. 26. 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 2015 26
  27. 27. 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 2015 27
  28. 28. Growth of the Hashrate 9 petahash 350 petahash39.8 x November 2015 28
  29. 29. Bitcoin VC Outpacing Early ‘Net VC November 2015 29 • 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

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