The authors of the much-discussed Bitcoin Sidechains paper “Enabling Blockchain Innovations with Pegged Sidechains,” released in October, have formed the company Blockstream to develop new ways to accelerate innovation in digital currencies, open assets and smart contracts. In November, Blockstream closed a $21 million seed funding round with nearly 40 investors, including well-known pioneers of the Internet and financial services sectors.
The Bitcoin Sidechains paper envisages an ecosystem of “sidechains” separate from the main Bitcoin blockchain but interoperable with it. A sidechain can carry bitcoin as currency, in which case users will be able to seamlessly transfer bitcoin between the sidechain and the main blockchain. At the same time, the sidechain can implement changes from Bitcoin Core. For example, a sidechain can implement more powerful scripting features or more watertight privacy.
For a readable explanation of sidechains, see “A simple explanation of Bitcoin ‘Sidechains,” by Richard Gendal Brown, executive architect for banking innovation at IBM UK.
“[A]t any point, whoever is holding these coins on the sidechain can send them back to the Bitcoin network by creating a special transaction on the sidechain that immobilizes the bitcoins on the sidechain,” explains Gendal Brown. “They’ll disappear from the sidechain and become available again on the Bitcoin network, under the control of whoever last owned them on the sidechain.”
The deployment of sidechains interoperable with Bitcoin requires the implementation of suitable hooks in Bitcoin Core. That will inevitably take some time, but it’s worth noting that some Blockstream team members are also Bitcoin Core developers.
In February, developers Joseph Poon and Thaddeus Dryja released a first draft version another much-discussed paper, proposing a decentralized Bitcoin Lightning Network where related transactions can take place instantly on “micropayment channels” off-chain, and only the final settlement is processed by the blockchain. According to the authors, lightning networks would enable bitcoin scalability, efficient micropayments, and near-instant transactions.
The implementation of lightning networks would also require appropriate tweaks to Bitcoin core. Some developers have noted that there is a certain degree of affinity between sidechains and lightning networks.
“Other approaches seek to modify Bitcoin protocols in various ways,” wrote Robert McGrath. “For example, Sidechains aim to create alternative blockchains hanging off the main blockchain, which would help limit the costs of the main blockchain. Another variant is the Lightning network, which aims to allow some transactions to be performed “on the side,” and on send the results to the main blockchain.”
Rusty Russell, an Australian developer known for his work on the Linux kernel, wrote a series of blog posts about interesting features of lightning networks. “The key revelation of the paper is that we can have a network of arbitrarily complicated transactions, such that they aren’t on the blockchain (and thus are fast, cheap and extremely scalable), but at every point are ready to be dropped onto the blockchain for resolution if there’s a problem,” he said. “This is genuinely revolutionary.”
Now it appears that the development efforts for sidechains and lightning networks are coming together. Russell, who joined Blockstream a few weeks ago, is working on lightning networks, and one of his first actions was to set up a Blockstream-hosted mailing listfor “Discussion of the development of the Lightning Network, a caching layer for bitcoin.” The new mailing list archives are freely accessible.
“They hired me,” Russell said on Reddit. “We agreed I’d be working on developing lightning. I set up a mailing list and am developing a toy prototype to explore the ideas. Will put on github once that’s ready (two weeks?) but it’s a long long way from anything someone could use. I’m excited about lightning, but it’s a marathon, not a sprint.”