As politicians continue to weigh in on what Bitcoin could mean to them and the economy in general, two enthusiasts are working on a project that could make mass adoption of the cryptocurrency more feasible, giving new momentum to the idea of Bitcoin 2.0.

Speaking at Let’s Talk Bitcoin last week, Adam Back, developer of the Bitcoin algorithm HashCash, and Austin Hill, Canadian entrepreneur and angel investor who founded anonymous networking and privacy technology company Zero-Knowledge Systems, discussed their new project called Blockchain 2.0, which focused on something called “side chains.”

Before we dig our teeth into what “side chains” are, let’s refresh our Bitcoin knowledge first. Bitcoin is a peer-to-peer payment system, wherein the product is called a digital, virtual, electronic or crypto-currency. Bitcoin doesn’t have a single entity that governs it like a central bank. Instead, it has a blockchain wherein all transaction records are reflected. The blockchain records the amount of each Bitcoin transfer that’s ever made, and logs which address these Bitcoins come from, and which address they’re sent to.

Go forth and multiply, young Bitcoin!


medium_5634409581So now we come to “side-chains”, a new concept that Back and Hill are attempting to sell to the Bitcoin community. As CoinDesk explains, for all intents and purposes, side-chains would effectively be new blockchains that are backed by Bitcoins, in much the same way that fiat currencies used to be backed by gold. Theoretically, there could be thousands of side-chains which are “pegged” to Bitcoin, with each one having a different purpose, but with all of them benefiting from the resilience and scarcity that’s afforded by the main Bitcoin blockchain.

Hill stated that the purpose of side chains is to increase the functionality and scalability of Bitcoin. He added that even though blockchains can already be adapted for this, he has yet to see anyone lay out any plans of how it would happen or work.

As more people become interested in Bitcoin, the need to expand its functionality is something experts and cryptocurrency enthusiasts have been looking into. Transitioning from Bitcoin 1.0 to Bitcoin 2.0 is one of the areas being looked upon, but doing so comes with its own challenges, such as the seamless transfer of Bitcoins from 1.0 to 2.0.

small__9618278472Back’s idea is evolved from a concept called “one-way pegging” that he described last year, wherein a Bitcoin could be moved from one blockchain to another that was merge-mined with Bitcoin. The transferred Bitcoin would be ‘marked’ as such, while a new Bitcoin in the side-chain would be tagged as a representation of the transferred Bitcoin.

This idea was expanded upon by Bitcoin developer Greg Maxwell, who came up with “two-way pegging”, wherein Bitcoins could be moved back and forth between the side-chain and the blockchain. This makes it possible for Bitcoins to be transferred back and forth at will, meaning that any coins wouldn’t necessarily be lost from the original blockchain forever. Bitcoins in side chains would be interoperable with those in the main blockchain, but despite this, they would remain unaffected by anything that happens in the side chains. So if the side chains encounter any security mishaps, Bitcoins in the main blockchain would be safe.

Does Bitcoin need side-chains?


Bitcoin doesn’t need side-chains, but there’s a compelling argument that alternative currencies can benefit significantly from them.

Sidechains“You can have multiple competing side chains that compete at the bitcoin level. Perhaps one that’s optimised for micropayments, argues Back. “You could move bitcoins into the micropayments sidechain, and then back again and then into the smart contract sidechain.”

One might argue that what Back and Hill are proposing already exists in the form of altcoins, or Bitcoin alternatives. The first altcoins were created by cryptocurrency enthusiasts looking to address perceived flaws in Bitcoin, and that’s where the likes of Litecoin came from. Since then, cryptocurrencies have become somewhat fashionable, with alternatives such as Dogecoin created for more comical reasons. With Altcoins, their values differ as well as the process in which they’re mined.

However, Back and Hill’s idea is somewhat different from just building a new altcoin. The main aim is to make it easier for people to add new features to Bitcoin (something that can’t be done without the entire community’s say so). This would provide an avenue for developers to make changes and play around with the rules in a separate side-chain, while keeping these coins linked to Bitcoin. This is unlike altcoins, which are entirely independent of Bitcoin. Side chains could be designed for specific purposes, such as making microtransactions faster.

At the time he came up with “two-way pegging”, Maxwell said side chains could ease the pressure on the Bitcoin developer community, which has been under constant pressure to tweak the blockchain in order to accommodate third-parties.

The two way pegging is important value proposition of side-chains, but it bears mentioning that this is a great sibling technique to “merged mining,” which uses the full security of the main blockchain at no additional computational costs to secure an alt-coin.

“Once adopted, people could try out speculative and innovative changes, while enjoying the network effect of bitcoin’s substantial adoption, without having to go ask anyone— not developers, not the community— for permission,” Maxwell stated.

And it’s interesting that while this is a revolutionary concept, some alts under development would likely be ultimately incompatible with side-chain methodology (like Ethereum, for example). Also, it’s unclear as to whether established alts could be ported to a side-chain methodology (potentially leaving hundreds of orphan cryptos out there).

Ethereum Vitalik Buterin described side-chain technology as “completing the quadrant of cryptocurrency choices:”

  1. Use the Bitcoin blockchain and Bitcoin currency (Bitcoin)
  2. Use the Bitcoin blockchain and other currencies (Mastercoin, Counterparty)
  3. Use a separate blockchain and the Bitcoin currency (Side-chain)
  4. Use a separate blockchain and a separate currency (Ethereum)

Side-chain still has some minor obstacles to implementation, but the road seems paved to allow it to happen. The core developers for Bitcoin have expressed a nominal endorsement on the general concept of side-chains, and most of the vocal community of enthusiasts and evangelists seem receptive to the concept. There have been no official timelines set for implementation, but it looks like the discussion is well in hand to progressing from theory to development within the next year’s time.

photo credits: btckeychain via photopin cc; Microbe World via photopin cc; Dusty J via photopin cc

Mike Wheately and Mellisa Tolentino, who contributed to this post, are senior writers at SiliconANGLE, and have been covering the Bitcoin beat since 2011.


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