Introduction To Sidechains and Blockchain 2.0

Posted by: Zubair Muadh June 26, 2014

Sidechains is a new concept that could help push Bitcoin forward and expand its functionalities.

Firstly we’d like to address what is the Blockchain?

A blockchain is a transaction database which is shared by all nodes in the Bitcoin system.All transactions since the creation of Bitcoin are documented on the Blockchain. Sidechains are built on top of the original Blockchain framework.

What are Sidechains?

Sidechains would in effect be new blockchains that are backed by Bitcoins in the same way currencies used to be backed by Gold. In Theory you could have hundreds of sidechains pegged to Bitcoin, each sidechain having a different purpose but with each benefiting from the resilience, scarcity and mainstream adoption of Bitcoin.

Why have Sidechains?

Developers and Cryptocurrency enthusiasts have been looking at expanding Bitcoins functionality as mainstream adoption increases. Side chains would increase the resilience of Bitcoin: If one of the sidechains was to be compromised, only the Bitcoins on that chain would be lost, while other sidechains and the Blockchain would continue like normal. This would further stabilize the Bitcoin network and increase security.

How does it work?

Bitcoin developer Greg Maxwell came up with the “two-way pegging system”.It’s a system where Bitcoins are moved back and forth between the sidechain and the blockchain.

This means that Bitcoins could be transferred back and forth at will and that the transferred Bitcoins won’t be lost forever from the original blockchain. The Bitcoins in the sidechains could still operate with the main blockchain but would be unaffected by any mishaps that occur in the sidechains leaving the blockchain safe.

The Technicalities
One-way pegging:
Let us call the current Bitcoin System Bitcoin 1.0 and the sidechain Bitcoin 2.0 So one would take one unit of Bitcoin 1.0 and send it to an unspendable address (e.g. 1111111111111111111114bRaS3) they’d also submit cryptographic proof of the transaction signed by the same private key that sent the transaction as a transaction into Bitcoin 2.0. The protocol of Bitcoin 2.0 would entitle the user to receive one unit of Bitcoin 2.0  This is called “One-way Pegging” as the value of one Bitcoin 2.0 is equal to one Bitcoin 1.0.  This system is only one way and creates a wormhole by which Bitcoin 1.0 disappears as there is no way of getting it back.

Two-way Pegging:
Firstly let’s address what a “script” is. A script is a Bitcoin address that isn’t owned by a Private key it essentially acts as a lockbox that unlocks Bitcoins only when givena transaction that would satisfy certain conditions.

For example, one can have a script that unlocks the funds to the first person who submits a fifty-digit prime number consisting entirely of the digits 3 and 5. Making the transaction, and publishing a cryptographic proof that such a transaction was made, into the Bitcoin 2.0 blockchain entitles the user to one unit of Bitcoin 2.0.

The script unlocks the (Bitcoin 1.0) funds when given valid cryptographic proof that the sender destroyed one unit of Bitcoin 2.0. Therefore making a mechanism for converting Bitcoin 1.0 to Bitcoin 2.0, this mechanism also limits the value of Bitcoin 2.0 created which can be converted back to Bitcoin 1.0. The two-way peg.

What are the Implications of Sidechains?

Sidechains with specific purposes could be formed with specific features while still enjoying the widespread adoption and value that Bitcoin holds.  Most importantly it can add these features without consensus from the Bitcoin community. Sidechains have the potential to replace many Cryptocurrencies as it allows features that were previously unique to these currencies to be available on Bitcoin. It also allows developers to experiment with sidechains and scope its full potential while still keeping coins linked to Bitcoin.

Updated: 2014-06-26