Brian Fabian Crain - 11.11.2014

Sidechains Bitcoin Startups Berlin

State of Bitcoin❖ Lots of altcoins, new projects, new blockchains

❖ Attempts to build new features, do more powerful things

❖ Many have poor security, are scams

❖ Slow development of Bitcoin core

❖ Concern about fragmentation of cryptocurrency space

❖ Destruction of digital scarcity

Outline

❖ What?

❖ How?

❖ Examples

❖ Why

Blockstream

❖ Adam Back & many core developers (Greg Maxwell, Pieter Wuille, Jorge Timon, Mark Friedenbach, Matt Corallo)

❖ Raised $15m from (atm) unknown investors - Business objective is to develop trustless cryptographic infrastructure later (Red Hat of Bitcoin?)

❖ No direct sidechains monetization

Sidechains

❖ Allow transfer of bitcoins between multiple blockchains

❖ Give users possibility of using new systems with the bitcoins they already own

❖ Allow permissionless innovation using the same monetary base but isolating the risks

Moving Coins1.Suspend coins on parent chain (e.g. Bitcoin)

2.Wait (confirmation period: 1-2 days)

3.Use proof of suspension on parent chain to unlock coin on sidechain

4.Wait (contest period: 1-2 days) Use coin on sidechain

5.Suspend coin on sidechain

6.Wait (confirmation period: 1-2 days)

7.Use proof of suspension on sidechain to unlock coin on parent chain

Attack Scenario I

❖ Peter controls 51% of Bitcoin hash power

❖ He suspends 1,000 bitcoin and waits

❖ He unlocks 1,000 sidechaincoin

❖ He goes back to before the suspension and redoes the work without the suspension => He now owns 1,000 bitcoin & 1,000 sidechaincoin

Attack Scenario II

❖ Peter controls 51% of sidechain hash power

❖ He suspends 1,000 sidechaincoin and waits

❖ He unlocks 1,000 bitcoin

❖ He goes back and reorganizes the sidechain and gets back his previously suspended sidechaincoins => He now owns 1,000 bitcoin & 1,000 sidechaincoin

Atomic Swaps

❖ Way to swap coins held on different blockchains in a trustless way

❖ May not be done 1-to-1 rate

❖ Alix might say I pay 1.005 bitcoin for 1 sidechaincoin to have it immediately (alternative: wait 2 days & pay higher fee)

Security

❖ If a sidechain is insecure —> the bitcoins on that sidechain are insecure

❖ If a sidechain is insecure —> the bitcoins not held on that sidechain are secure

❖ If Bitcoin is insecure (double spending, forged SPV-proofs) —> all sidechains are insecure

Security of Merged Mining

❖ Security of merged mining (Peter Todd) - assume 100 sidechains, most have <10% of Bitcoin’s hashing power - attacking any of those sidechains is cheap

Use Cases: Bitcoin Development❖ Sidechain can be used to test new features

❖ If they prove to work, they can be integrated into Bitcoin

❖ Advantage:

❖ Money at stake (unlike testnet)

❖ Permissionless innovation

❖ Features available before integration into core

❖ Disadvantage: Risk of losing money on sidechain

Use Cases: Scalability

❖ Scalability vs decentralization tradeoffs

❖ Bigger blocks: - cheaper transactions - more centralization

❖ Smaller blocks: - more expensive transactions - less centralization

Use Cases: Privacy

❖ Monero, Darkcoin aim for more privacy

❖ Scalability tends to be poor, no usage

❖ Move bitcoins to a sidechain that supports privacy

Use Cases: Trustless Exchange

❖ Bitcoin can handle <7 tps and are expensive

❖ Bitcoin exchanges are off-chain or settle daily (Bullion Bitcoin)

❖ Performance and costs make it unattractive/difficult to run an exchange on blockchain

❖ Maybe this could be achieved on a sidechain

Sidechains & Ethereum

❖ Ethereum could be (?) directly implemented as a sidechain

❖ Ethereum could be forked and be implemented as a sidechain (ether is out)

❖ Where are the network effects? Currency & Eco-system

❖ Sidechains mean increased risk of successful Ethereum fork

Digital Scarcity❖ What will you price life insurance contract in 20 years?

❖ Bitcoin today represents 91% of value of all cryptocurrencies If there will be a cryptocurrency to displace Bitcoin, how do you know there won’t be another one later to displace that one?

❖ Sidechains are key to make Bitcoin a long-term reserve currency, store of value and settlement system

Where do I see this going?❖ Three caveats:

- if sidechains work as promised - if the merged mining provides reasonable security on sidechains - if Bitcoin itself remains secure

❖ then I believe sidechains will enable Bitcoin to become THE store of value and reserve currency of the future.

❖ Bitcoin transaction might serve to regulate money flows between different side chains

Questions? Comments?