Adam Back, co-founder and chief executive officer of Blockstream Corp., speaks at the Group of 20 … [+] high-level seminar on financial innovation “Our Future in the Digital Age” on the sidelines of the G20 finance ministers and central bank governors meeting in Fukuoka on June 8, 2019. (Photo by Kiyoshi Ota / POOL / AFP) (Photo credit should read KIYOSHI OTA/AFP/Getty Images)
Tomorrow, it will have been exactly five years since a new Bitcoin technology known as sidechains was announced to the general public by way of a white paper (PDF). The basic idea explained in the paper was that Bitcoin users would be allowed to move their coins between multiple, completely different blockchains that could enable a wide range of new cryptocurrency features.
The end result of this functionality would theoretically be an end to the many altcoins that existed on the market at the time, as there would be no longer be a legitimate reason to create a new cryptocurrency in an effort to experiment with new features. Instead, new features that were sufficiently complex could come to Bitcoin by way of sidechains.
Today, sidechains do exist, but they come with trade-offs in the areas of centralization and censorship resistance – at least for now. At the recent Transylvania Crypto Conference, a panel of experts on the topic, including Blockstream CEO and sidechains white paper co-author Adam Back, discussed the current state and future potential of sidechains for Bitcoin.
The End of Altcoins?
Despite the hype around Bitcoin sidechains, altcoins still very much exist. In fact, Ethereum briefly surpassed Bitcoin in terms of transaction fees collected by miners per day around the start of October (although that may not mean much for the ETH price).
That said, Back is still bullish on the idea that sidechains will eventually diminish the attractiveness of alternative cryptocurrencies.
“In the history of altcoins, it seemed like there was a period where there were a huge number of them that had no features,” said Back at the Transylvania Crypto Conference. “And that played out. And then people started to need a new way to market them, so they added features. Some of them were real features, and some of them were stories to market [their altcoins].”
Back added that making Bitcoin more modular could allow developers to more easily bring new features to the peer-to-peer digital cash system, but there is a problem with incentives when it comes to altcoins versus sidechains. Those who are motivated by money are incentivized to create an altcoin rather than simply innovate on Bitcoin.
“This financial incentive will remain, but it will have less credibility because if you have a very easy to use extension mechanism for Bitcoin and examples of extensions that do something simple that you can build on, there’s not really a good story about why you’re doing it somewhere else,” explained Back.
In Back’s view, the development of the internet would have been as distracted, disorganized, and confused as the evolution of Bitcoin if everybody was making forked copies of TCP/IP with slight tweaks rather than simply pushing forward with one unified protocol stack.
Back also added that sidechains aren’t the only solution here. This concept of building on Bitcoin and weakening the viability of altcoins can be applied to layer-two protocols built on top of Bitcoin more generally. In the past, many have argued that Bitcoin’s Lightning Network makes altcoins focused on fast, cheap payments look rather pointless.
Making Better Sidechains
The versions of sidechains that exist today aren’t exactly trustless. Blockstream’s Liquid sidechain puts control of the funds on the sidechain into the hands of a federation of Bitcoin exchanges, traders, and other financial institutions. An alternative system known as Drivechain, which has been developed by Bitcoin researcher Paul Sztorc, would put miners in control of the funds on the sidechain, but enabling this type of sidechain would require a soft-forking change to Bitcoin.
“Your risk with Bitcoin is that, ultimately, the coins are escrowed in some way – in a somewhat decentralized way,” Back explained at the Transylvania Crypto Conference. “If it’s merged mined, the miners, collectively, could take them against the protocol, or if it’s in some kind of HSM-assured multisig, somebody could go hack two-thirds of the HSMs.”
Of course, these trade-offs are often viewed as acceptable, especially when the vast majority of Bitcoin’s competitors seem to miss the point of why Bitcoin was created in the first place.
At a developer meetup last year, Blockstream Mathematician Andrew Poelstra stated that, in his view, the high degree of centralization in the Bitcoin mining industry made some previously-envisioned forms of sidechains untenable. However, Poelstra is also of the belief that zero-knowledge proofs may eventually be the way forward for this technology.