I’ve written a lot recently about the potential of replicated, shared ledgers that are private/semi-private. For example, I suggested that industries with duplicated systems across firms might get benefit from adopting this technology.  But I also keep an eye on what’s happening in the Bitcoin world.  So the Blockstream “Elements” launch caught my attention this week.

I wrote about the idea behind sidechains late last year and so it’s interesting to see parts of the vision turn into real code. Back then, I said that a way to think about this is as a system that lets you “move” bitcoins from the Bitcoin blockchain onto another bitcoin-like system and back again in a way that doesn’t harm the Bitcoin network and doesn’t require you to trust a central entity like a Bitcoin exchange.

Why would you want to do that?

• First, it could be a good way to prototype proposed changes to the core Bitcoin protocol with lower risk: the change could first be implemented and tested on a sidechain, a relatively safe environment. And, should the new system work well, those who needed the feature could transfer their coins to that sidechain, knowing they could bring them back again in the future.
• Secondly, and looking further ahead, this approach could also provide a migration path for existing bitcoin holders to a new version of the network – offering an alternative to a hard-fork.

It’s an attractive idea and one can intuitively sense why it could be valuable. Of course, the idea is not perfect. Developers such as Peter Todd, have argued that sidechains would be vulnerable to attack under various circumstances. But, leaving that to one side for now, what was announced this week and what does it mean?

Sidechains Announcement

What follows is deliberately brief in order to share thoughts quickly:

• A sidechain is now up and running and accessible from the Bitcoin testnet.
• The sidechain can be thought of as “just like Bitcoin” (or just like Bitcoin testnet) but with several additional features, or “elements”.
• These elements include features such as “confidential transactions” and “relative locktime” (full details here and I explore two in a little more detail below)
• A mechanism for moving coins to and from the sidechain is up and running… but this mechanism currently relies on a network of semi-trusted oracles, or “functionaries”, to validate the return of coins to testnet. This is because the necessary changes to enable this in a decentralized fashion do not yet exist in Bitcoin and one should remember there is no guarantee such a change would ever happen
• The sidechain is also currently secured by this network of functionaries”. I understand this is a temporary situation but one could argue it means the distinction between permissioned and permissionless ledgers could be becoming somewhat blurred. Preston Byrne of Eris Industries has said something similar.
• The code is open source so other people could set up their own sidechains and run their own functionaries.
• In what I think could be a smart move for gaining mindshare, blockstream have signed up several universities with Bitcoin projects/programmes, such as MIT and Princeton to run these “functionaries”.

Elements

The individual features being explored initially have been called “Elements”

Of particular interest to my readers might be Confidential Transactions and Issued Assets.

Issued Assets is an attempt to add support for Colored Coins-style assets to the core protocol. This is the one feature that is not yet deployed to the sidechain but it is also one of the most intriguing. I’ll be watching for comment from those projects in the coming days.

Confidential Transactions are a very clever application of cryptography to hide the value of transactions whilst still allowing them to be fully validated by the network. If this works well, it could be a partial solution to the confidentiality issue faced by Replicated, Shared Ledgers.

The fundamental characteristic of these systems – both permissioned and permissionless – is that multiple copies of the ledger are maintained and that these copies are widely distributed. Without features like Confidential Transactions (or related technology such as ZeroCoin or ZeroCash), these systems may be  unsuitable for those with confidentiality and privacy requirements. Do you want everybody in the network knowing your positions?

Based on what I’ve read so far, I’m not sure this is a full solution – financial firms care about more than just the value of transactions – but it’s a good start.

Next Steps

The test for me in coming weeks will be the extent to which non-Blockstream developers engage with this and other sidechains. I’ll also be paying particular attention to the Bitcoin Dev mailing list to see if any debate begins about making changes to the core protocol to allow decentralised pegging to work directly.   [Update 2015-06-11 to correct pegging terminology. Thanks to joeykrug for the correction]