An important sidechains whitepaper was published a few years ago:

You’ll know this is a seriously eminent group of authors if you’ve followed Bitcoin for any time.

The whitepaper is quite technical and describes a way to build “pegged sidechains”. Sidechains as an idea have existed and had been floating around for quite some time now. The key breakthrough was outlined earlier in 2017. But this paper offers a simple but deep explanation of just what sidechains are, what they can be used for and why they are so awesome, and it has attracted a lot of comments. Ever since the concept was first publicly discussed in the media back in 2014, the idea of sidechains is something that has garnered a large amount of hype in the Bitcoin community.

But what are sidechains and why should anybody care?

Knowing how Bitcoin itself works is the key to understanding most innovations in the Bitcoin space. Most people don’t really understand how it works and, as a result, they have a faulty mental model.

I came up with an analogy for Bitcoin earlier in the year to help with this. The analogy is based on thinking of Bitcoin “unspent transaction outputs” as parcels of land. Some people hated the analogy. However, I still think it has value.

But I’ll skip the analogy in this piece and net it down to the basics.

First, you need to clear your head of anything related to payments, currency, or money. Also, the mind-bending secret of Bitcoin is that there actually isn’t a ledger, so clear your head of the word ledger, too. The transactions and blocks of transactions are the only data structures that matter. And if sidechains are going to make sense, it’s important to get this clear in your head.

You are saying this when you “move” Bitcoins:

The critical three parts of a Bitcoin transaction

It is important to note that there are a few important points here:

Great. The “grammar” of a Bitcoin transaction is clear now: “Here are the Bitcoins I want to move. Here’s the proof I’m entitled to. Here’s what the recipient has to do, in turn, if they want to spend them”.

This transaction is published into the network and it will eventually find its way into a block.  Everybody can be pretty sure it won’t be reversed after other blocks have been built on top. So what more do you need?

This three-part structure to a Bitcoin transaction works pretty well. It turns out that you can do some really interesting things with it. For instance, the “not-entirely fungible” feature can be used to “tag” coins, which is the basis of the “Smart Property” and “Colored Coins” worlds.

However, there are some issues, such as:

As I already mentioned, sophisticated rules can be built into Bitcoin transactions to specify how ownership is proved. However, the Bitcoin scripting language is deliberately limited. Also, many ideas in the Smart Contracts space are difficult or impossible to implement. So, to explore these ideas, projects like Ethereum (https://www.ethereum.org/) are building a completely new infrastructure.

The “three-part” transaction structure is very general. However, it only allows you to transfer ownership of Bitcoins and some people would like to transmit richer forms of information across these types of systems. For instance, a decentralized exchange needs a way for users to place orders, and projects such as NXT, Counterparty, Mastercoin, and others either build layers on top of Bitcoin or use completely different codebases to accomplish their goals.

Bitcoin’s block interval is ten minutes. This means that it takes around ten minutes on average for a new transaction to find its way into a block, even if it pays a high fee. For some people this is too slow. That’s why they have experimented with alternative cryptocurrencies, based on the Bitcoin code-base, which employ faster block intervals.

You get the same security guarantees, whether you’re moving 0.01c or $1bn across the Bitcoin network, and you pay for this in fees and time. Are you prepared to trade safety for speed? Today, sending the coins to a centralized wallet provider, whom you must trust not to lose or steal your coins is your only real option. You can then do all the transactions you like on their books, with their other customers. Also, you never need touch the Bitcoin blockchain. However, all the benefits of a decentralized value-transfer network are now lost for you.

One-Size-Fits-All Security Model Doesn’t Help If the Size Doesn’t Fit You!

Now, it is very risky to make experimental or rapid changes to Bitcoin. That’s why the change happens slowly. So you have a problem if the one-size-fits-all architecture of Bitcoin doesn’t suit a particular use-case. You either have to use (or build) a centralized service, which brings new risks, or use an entirely different cryptocurrency (or build one!).

This is very inconvenient and it creates risk and fragmentation and slows the build-out of infrastructure, services, and products.

There is a very interesting observation that we can make. What would happen if you send Bitcoins for safekeeping to a centralized wallet such as circle.com?

Circle is a black box, from the perspective of the Bitcoin network. You had some coins and you sent them to a specific address. Some things happened that Bitcoin couldn’t see, and at some point later, you had control of some coins again. It’s as if someone had moved those coins from Bitcoin to somewhere else and then back again.

The key idea behind the sidechains concept is:

What if Bitcoins could be sent not only to centralized services, addresses, and individuals but to other blockchains?

What if there’s a Bitcoin-like system out there that you would love to use. Maybe it is Etereum or Litecoin. Maybe it is something brand new. Maybe it has a richer scripting language and a faster block confirmation interval. It doesn’t matter. The point is that you’d like to use it. However, you would rather not have to go through the effort and risk of purchasing the native tokens for that platform. You already have Bitcoins, so why can’t you use them?

These are the sidechains ideas:

Sidechains use the standard bitcoin “three-step” transaction to immobilise Bitcoins while they are “on” the sidechain

So, to repeat, to move coins out of reach, we’ve used standard Bitcoin transaction functionality. We then prove to a second, unrelated chain, that we’ve done this, and when we’re done, whoever owns coins on the sidechain can do the same thing and send them back to the bitcoin network.

This means that developers get the opportunity to experiment with different types of cryptocurrency rules. The best thing is that they don’t need to create their own currency.

We now have a way to move coins from Bitcoin onto another platform (a sidechain) and move them back again, and that’s pretty much what we do when we move them to an exchange or a wallet platform. But the difference is that the “platform” they’ve been moved to is also a blockchain. This means that it has the possibility of decentralised visibility, security and to gain from other innovation in this space.

For instance, you could imagine a sidechain that is “mined” only by one company, which would be identical to a single-company wallet, but with full visibility of transactions.

Moreover, you could imagine a sidechain that is mined by 100 different companies in a loose federation, which are not totally decentralized, but more difficult to subvert or censor than if it were just one.

There are many other possibilities as well. The key is that you can build these services, products and experiments without also needing to fall back into the old centralised style or create a new currency.

I look at sidechains as an architecture for building semi-decentralised services and products for Bitcoin that were simply not possible before.

It is important to note that there are some serious problems with the scheme and there are a few big hurdles to jump. Peter Todd has raised doubts about how secure it might be. He also said that it might require a one-off change to Bitcoin.

But it’s still early days and who knows what the future holds and what other innovations this technology will bring. I am sure that at this moment we can only imagine the visible tip of the iceberg.

Sidechains go a significant way to helping create a connected financial digital ecosystem and I’m looking forward to watching this space develop.

The post How to Simply Explain Bitcoin Sidechains – A Guide for Total Beginners appeared first on CaptainAltcoin.

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