Sidechains

Earlier this year some entrepreneurs walked into our office and explained sidechains to us. I was pretty excited about the concept then and I continue to be excited about it. This past week some of the people who explained them to us and some other people I don’t know published a paper about sidechains called Enabling Blockchain Innovations with Pegged Sidechains. I think this is an important paper and everyone involved in bitcoin, blockchains, and cryptocurrencies should give it a read.

Here’s the basic idea in layman’s terms. I am purposely trying to dumb down and simplify the idea here.

1) The Bitcoin Blockchain is the most liquid blockchain, has the most mining on it, and is likely to remain that way given the network effects it has built up over the past five years.

2) The core Bitcoin system and software is not likely to change very much because making changes to it is risky and there is a lot of capital at stake on the Bitcoin blockchain now.

3) There are things you might want to do that are not well supported or not supported at all on the Bitcoin blockchain.

4) This desire for “other things you might want to do” has given rise to a ton of alternate blockchains, none of which have developed a lot of liquidity and mining on them.

5) So what if you created “sidechains” that are “pegged” to the Bitcoin blockchain that allow “other things you might want to do” while still leveraging the liquidity and mining of the Bitcoin blockchain?

That’s the basic idea and the paper I linked to explains how to do the “pegging” part which is critical to this whole idea working.

I believe that the core Bitcoin system and software will have to be modified to allow these “pegs” and I’m pretty sure (but not positive) that these changes have not yet been made.

It will be interesting to watch how all of this develops over the next year or two. If “pegs” are added to the core Bitcoin system and software, and if sidechains become popular and viable, then Bitcoin would essentially become the reserve currency of the entire cryptocurrency sector and there would be a host of sidechains and currencies that are pegged to it. This would allow a ton of innovation to happen around Bitcoin without requiring a lot of change to the underlying Bitcoin system. Which seems sort of ideal given how much money ($5bn at current prices) is at stake now.

#hacking finance

Comments (Archived):

  1. Eric

    Any idea who (person/committee/etc) would be able to make a yes/no decision re: pegs being added to the core Bitcoin system?

    1. fredwilson

      the bitcoin core developers need to make that call

  2. jason wright

    gold standard

    1. fredwilson

      sort of

      1. jason wright

        not a great analogy. monday morning.

  3. William Mougayar

    That paper, along with the Ethereum paper are probably the 2 most significant (and innovative) ones in the Bitcoin space since Satoshi’s paper.Curious why you didn’t invest in Blockstream?

    1. fredwilson

      i don’t think its a good idea for me to talk about that publicly and i won’t

    2. JimHirshfield

      How do you know he didn’t?

      1. fredwilson

        we did not

        1. JimHirshfield

          so much for mystique and speculation 😉

          1. jason wright

            i think each of USV’s investments should have a discreet USV logo placed somewhere appropriate on their website for the duration of the investment, and linking back to the USV website.

          2. jason wright

            cowboys and their brandings.

          3. LE

            I like the one in Jaws where Roy Scheider says “of course I can do that I’m the chief of Police” (in response to Dreyfuss wanting to know if they can open up the Shark.)

      2. William Mougayar

        i don’t think its a good idea for me to talk about that publicly and i won’t- am learning to be a vc 🙂

        1. JimHirshfield

          Learnings

  4. JimHirshfield

    So…Sidechains are to Blockchain like Plugins are to WordPress?

    1. fredwilson

      that’s not a bad analogy but i think that sidechains are more important than wordpress plugins

    2. kidmercury

      there needs to be someone to close it. if i install a wordpress, i’m the one who controls the core OS (WP) and the apps on it (plugins). same if i have a phone with apps. who does it with sidechains/blockchain? no one. evangelists will say that’s what makes it awesome; haters will say that’s why no one uses it for anything real.

    3. William Mougayar

      Well, actually Bitcoin is more like a protocol, not an application. It’s more equated with the Internet protocol ipv4 or ipv6.

      1. JimHirshfield

        True that.

    4. Andrew Kennedy

      good one

      1. JimHirshfield

        Oh, thanks.

  5. jason wright

    this is art

    1. fredwilson

      what is art? blog commenting? blogging? bitcoin? sidechains?

      1. jason wright

        the conceptual idea of sidechains, then expressed as this image. i’d put in on my wall, in an ornate carved frame in gold leaf. more vibrant colours would enhance it.in your chat with Richard Florida you said it’s art (Etsy was the example there if i remember correctly).

      2. LE

        I’m guessing this is a case of disqus not posting the image in real time.Time to fix that Disqus. I hate when I take the time to upload a picture and then people read my comment and it makes no sense without the graphic that I’ve taken my time to curate, find and upload..

        1. jason wright

          it probably was. i’ve noticed before that it’s sluggish at presenting attachments.

  6. Kasi Viswanathan Agilandam

    Peggins have landed….

  7. Kasi Viswanathan Agilandam

    Do you wish to change the “bitcoin system”? … you post sort of suggest there is some flaw in the system and the cost/risk of changing it is too high … So let us live with the flawed one?

    1. fredwilson

      the oppositei don’t want to change the system. it works great for what it was built for.

      1. jason wright

        do you still favour an inflationary component tweak?

        1. fredwilson

          maybe on a sidechain?

          1. jason wright

            can’t say until i’ve read and understood the paper.

          2. mike

            bitcoin is highly inflationary for the next 30 or 40 years

  8. gregorylent

    bitcoin for me is like electricity or electronic circuits .. i know “about” it, but have NO idea what it is .. my mind simply cannot process either

    1. Chimpwithcans

      Same here. I would really appreciate someone giving me a breakdown list of “must know” topics to read about before you reach understanding of what a bitcoin is. I know what a bit isI know what a coin isSomehow that doesn’t seem enough!

      1. Simon Edhouse

        Think of it as a rock solid agreement that ‘x’ happened.. and because there is a technology (the blockchain) to support that agreement, it naturally supports financial exchanges. NOTE: No file is exchanged, just the agreement. Based on this system’s reliable efficacy, it naturally lends itself to all sorts of other uses. That’s about it, besides the core attribute of there being no central authority to validate the agreement, which is why it works so well.

        1. Chimpwithcans

          Thank you. Very helpful.

      2. Pete Griffiths

        The currency or coin aspect of bitcoin is not the critical innovation. The real step forward is the blockchain as a solution to network trust for any kind of transaction without a central agent to guarantee such transactions. Cryptocurrencies are just one (obvious) application of such distributed trusted transactions.

        1. Chimpwithcans

          Thanks. Most stories I have heard come from mainstream media, and link bitcoin to shady underworld trade in arms, drugs etc. because it is less traceable currency for the central banks – But from what you say, and from what I am starting to gather – part of the blockchain’s appeal is that it is trustworthy and a way of assuring a transaction. These two narratives are confusing. Seems to me, for its own sake, the faster blockchain gets used for something other than cryptocurrency, the better. Would that be accurate?

          1. Pete Griffiths

            a) distributed trust is the absolutely fundamental innovation and it can be used for more than currencyb) ‘the faster the blockchain…..other than…” I don’t know if that is better or not. This is a radical innovation and it is very hard to predict where it will lead. Sorry I can’t be more clear about it. Happily it’s Fred’s job to figure this stuff out.

          2. Chimpwithcans

            Thanks for the time taken to explain/discuss.

          3. Pete Griffiths

            🙂

    2. JLM

      .Please stay in your lane because there a lot of us in that same pool.JLM.

      1. LE

        I just watched a video that explained how a differential transmission worked, was posted on HN:http://www.youtube.com/watc…What’s funny is that the simple explanation of it made it seem harder than it was. The part at the end where I saw it seemed very simple in my brain. (And I’ve seen that before).Further more, and this is important, having a small differential gearbox in my hands would have meant instantly knowing the principles and how it worked.(I’ve found that with machinery or things I’ve taken apart both as a kid and as an adult. It just clicks since I guess I’m a visual learner).Bitcoin is the type of thing that clicks when you use it. Otherwise I think it’s a hard thing, like explaining the high you get from a deal, or why men like machines, to put into words.

        1. SubstrateUndertow

          You never know what you will learn on AVC :-)I ‘ve waited a lifetime for this morsel of serendipitous knowledge !Edit:Suddenly the lights go on and I see your analogy 🙂

  9. William Mougayar

    The Two Bit Idiot blog also did a good job explaining sidechains. Basically what it puts into question all the alt-currencies that were trying to push the envelope outside of Bitcoin. Now, it can be pushed within Bitcoin.”In a nutshell, sidechains are simply alternative transaction ledgers that connect to the Bitcoin blockchain and use “pegged” bitcoins as currencies — rather than alternative currencies with separate blockchains and code bases. (Crucially, bitcoins moved onto sidechains can also be moved back to the parent Bitcoin blockchain at any given time.) Sidechains offer the experimental sandbox of altcoins, but with radically improved interoperability and developer cohesion around the core Bitcoin blockchain and protocol.”

    1. fredwilson

      that’s a great description

      1. William Mougayar

        Yes. I’m loving the Two Bit Idiot’s blog (on Tumblr). He writes with such clarity on crypto-currency topics.

    2. Tom Labus

      Does this allow manipulation?

      1. William Mougayar

        hi Tom, do you mind elaborating on “manipulation”?

        1. Tom Labus

          All governments manage their currency to some extent and was just curious as to how they plays in Bitcoin.

          1. SubstrateUndertow

            Good Question !Could governments, banks or corporations use such sidechains to drain substantial enough portions of bitcion’s blockchain value into such sidechains as to damage/impede/manipulate bitcoin’s global behavioural attributes or sustainability ?

          2. FornuftFTW

            No. They obviously can’t manipulate Bitcoins they don’t own, sidechains or not. There wouldn’t be any difference between them just buying a ton of Bitcoins and not using them, and them buying a ton of Bitcoins and using them on sidechains.

          3. SubstrateUndertow

            “drain substantial enough portions of bitcion’s blockchain value into such sidechains as to damage/impede/manipulate bitcoin market dynamics”They may not be able to manipulate Bitcoins they don’t own directly but they could potentially disturb bitcoin’s volume inertia so as to cause disturbances ?

    3. ZekeV

      Side chains will make bitcoin more valuable, but there’s no incentive for developers to do the work unless they also own a lot of bitcoin. So I think the side chain software will mostly be in service of companies that have a proprietary monetization scheme — e.g., the coinbases and crypto property exchanges of the world.For better or worse, I predict that alt coins will continue to proliferate, and will be the instrument of choice for monetizing open source software projects. Bitcoin’s success actually makes alt coins *more* attractive for their promoters. This may be annoying to die hard bitcoin monetarists, but it is borne out by experience in the market. This is where the really smart cypherpunks occasionally go wrong, in my view — there is a logical disconnect between thinking that all this stuff that will be helpful for bitcoin will not be equally, if not more, helpful for bitcoin clones. Up to a point, anyway.

    4. SubstrateUndertow

      So a Sidechain acts like a dynamic Bitcoin-wallet where internal to that specialty wallet is a secondary experimental blochchain variant operating only on that wallet’s bitcoin content ?

      1. JamesHRH

        Here – put my (401)k transactions on that bad boy.

    5. twitter.com/kazisuhail

      This sounds like a form of Github or any version control for blockchains: fork blockchain->change, iterate, test, –>pull it back into main blockchain.

  10. Vitor Conceicao

    This sounds interesting but it is still using blockchain as currency. I think that the really innovative uses of blockchain as a protocol will be for uses that are completely unrelated to currency.Not sure what those uses could be, but this is what I’m waiting and looking for in the blockchain movement.

    1. William Mougayar

      I think both sides are important, but you’re right that non-currency crypto-land applications are also important.

    2. Justin

      The blockchain can’t exist without a token of monetary value as the incentive to mine and secure the blockchain. You can’t split the two. You can build on top of it and use it for other things, but you can’t take out three currency part.

      1. Vitor Conceicao

        I agree that you need some kind of reward system, but it doesn’t need to be monetary. The possibilities are way open. You could have an app that would be mining on the background while you used it for access to something. For example the mining could create API tokens instead of coins.Of course if you go into a more economical theory discussion you will say that eventually whatever is mined will have value and this value will be converted to real currency. You will probably be right, but I think that the path of a non-monetary blockchain will have a bigger chance of growing it to a huge thing before it starts being convertible.And this is the way I think some kind of really global cryptocurrency will emerge.

  11. pointsnfigures

    I think that is a good idea. It’s sort of like the Chinese pegging their currency to the US dollar in an abstract way. No system developed by a human will be perfect, and sidechains might be a good hack at solving eventual problems that occur.

    1. Andrew Kennedy

      I think it goes deeper than that. The Yuan is liquid as is the US $ (which of course everyone knows). Having 2-way pegged sidechains is effectively creating a single digital currency network that can leverage existing liquidity in BTC to allow for innovation in future blockchain technology without risking the overall stability of what is working. It let’s digital $$ move to where it feels the safest or where it sees the most upside. To me it opens the door for real market dynamics in digital currencies.

  12. Andrew Kennedy

    I am going to closely read this white paper. thanks for posting. This boils down to liquidity, right? The idea of liquidity and interconnectivity (exchanges) between blockchains makes perfect sense to me.

  13. kirklove

    I got all excited with all the Peg mentioning! ;)Gotta admit your layman explanation didn’t help. Is this like branching say on Github?

    1. kidmercury

      i think altcoins, like litcoin, zerocoin, etc are more like branching on github. they take an existing code base, but do not leverage the existing user base of that code.sidechains leverage the existing user base (namely mining resources). it is a bit like building a group on facebook instead of building a standalone forum; building on fb lets you leverage the existing fb user base. of course there are trade offs……

      1. kirklove

        Thanks Kid. That explanation helps a lot.Unrelated: Tough loss yesterday against Arizona 🙁

        1. kidmercury

          man that was rough!!!! i mean a great game — the kind of game i love being a football fan for — but also the kind of game that makes me a bit sadder even on monday morning. 🙁 eagles cornerbacks got burned too badly…….cary williams needs to stop complaining about practicing too much if he’s going to get burned like that. but world class game from j-mac!!!!!

          1. kirklove

            Exactly. J-Mac was a beast!

  14. Conrad Ross Schulman

    come on guys..enough hiding behind the wall of ‘not being able to understand” bitcoin. we’re way past that.

    1. awaldstein

      Honestly not really.Parse this out. Investors understand. Financial services certainly do. Developers in the digital currency space do. Pundits do.The rest which is most everyone won’t. I think possibly ever as they won’t need to.

      1. Chimpwithcans

        It’s a niche understanding. Much like Swahili. I understand Swahili, Billions of dollars transact on the understanding of Swahili, but i don’t expect everyone else to understand it…even if it’s obvious to me.

        1. awaldstein

          I think it is critically important and I put in the time to understand it even though I am not investing in it and don’t have any accounts working in it.But it is confusing generally. Much more clear if you have a point of view. Investing as one. Defensive or offensive if you are in financial services.Generally-bit coin is confusing. In context no more so than anything else with deep and still dynamic technical roots.

          1. Chimpwithcans

            Yep. Deep and still-dynamic technical roots will get me every time 🙂

          2. LE

            I think the issue relates (as I said in my other comment) to not actually using it and just reading about it.So it’s hard to wrap your head around the concept as just words and examples.Like how can you wrap your head around the fact that steering a boat is not like steering a car unless you’ve driven a boat?Once you get “behind the wheel” it immediately makes sense and your brain has a point of reference for the concept and what it is (not precise steering as one point).”Computer guys” have always been good at thinking at a level that is hard for “non computer guys” to process. Part of this is intentional (similar to law being obscure) it allows you to earn a living out of other’s ignorance and befuddlement.

          3. awaldstein

            Sure but everyone who cares about it uses it and they are either investors, financial services or developers or pundits.If you are not one of those and/o have not used it, better to stream a movie than engage in these discussion.

          4. LE

            I’m not seeing a use for it in my life. At this point. From what I see.The given intermediaries and middlemen that I use seem to provide adequate value at whatever the cost is. It’s a non issue in my world at least. (So how many people are like me is my point…you’re the same)Plus some of those intermediaries, such as the women who runs a title agency in the same complex is steeped in paperwork of which payment or “clang of the mailbox” is only a small part of what they are doing. And the other parts (title searching, keeping up everyone’s ass to make sure all players do what they need to do) and all the crap you sign when you settle a loan aren’t going away anytime soon.I have a few customers that are state government or cities or town or colleges etc. You can’t believe the amount of legacy “back to the 50’s” paper they still generate. The people who run those places (as well as many of my customers) are still writing checks.Here’s something that I just thought of that is obvious.Investors (VC’s etc.) don’t seem to see the difference between things that are driven and used by early adopters and the obstacles to things that need to be adopted by a diverse group of business people who have legacy interests and tend to be older and more risk averse.Part of this stems from not really being in the boiler room of business.If you spend time in that room (and you do of course) you know that simply calling the electrician to show up to fix your panel doesn’t mean he will show up to fix your panel.

          5. awaldstein

            I think block chain as a concept has a good chance of being a game changer.it can do this without ever being understood by the mass market. like fred said in some conversation, like rss.i think that is very possibly how this will play out.

      2. Newniz

        I have yet to hear a financial services person, i.e., Wall Street person (other than Barry Silbert) who really understands Bitcoin. Most pundits do not understand it either. Heck, most VCs I hear speak on the subject do not understand it. Fred is a humble VC who understands it better than most.Really and truly understanding it requires the ability to read code. On top of this there are layers of understanding: protocol, economics, monetary theory (including out of favor “extremist” versions), etc. The number of people who understand Bitcoin in its entirety can probably be counted on two hands.

        1. awaldstein

          ‘really and truly understanding’ is truly not relevant actually.The world is built every day by teams of people contributing pieces of expertise to a whole.The idea that there is some absolute knowledge that only 10 people in the world truly get is just so effete and silly.Absolute scales of anything including knowledge are invariably artificial.

        2. Pete Griffiths

          I think that ‘understanding’ bitcoin remotely comprehensively requires two very different kinds of expertise:a) computer science & cryptography – to understand why distributed trust is important and roughly how it worksb) economics – to try to get a handle on what bitcoin and other cryptocurrencies ‘mean.’ My observation is that very few analysts are equally comfortable with both for obvious reasons. The balance of expertise applied to bitcoin is largely on the technical side. There are more nerds who understand the crypto than economists taking it seriously and trying to figure out its implications.IMHO it is important to have some economics training to start opining on what bitcoin ‘means’ because the kinds of things that economics think about are directly relevant to what cryptocurrencies are. And it is painful to watch CS people opine on the economics blissfully unaware of the tools the have been developed and the experience that has been gained in thinking about this kind of thing. The number of discussions i have witnessed where (with the best will in the world) people confidently state things about the implications of bitcoin, predicated on, for example, theories of value and markets that have long been discredited, is legion.If it makes anyone feel any better, I have a masters of sorts in CS, a economics degree and an mba and I can’t figure out what it means. All it helps me to do is recognise what is obviously deeply wrong.

      3. SubstrateUndertow

        “The rest which is most everyone won’t”Isn’t that also true as regards the general public’s comprehension of the underlying mechanics that drive traditional money and credit systems ?People don’t widely understand all the complex indirect linkages of traditional monitory/credit systems.To my way of thinking, it is all that sloppy HIDDEN indirect linkage and HIDDEN leveraging that makes the traditional money/credit system’s illegitimate value manipulations “the root of all economic evil”.Trust us, we are operation all this complex monetary/credit systems for the benefit of all. No need to bother yourselves with understanding the mechanisms hiding behind the curtain folks.

    2. LE

      ‘enough hiding behind the wall of ‘not being able to understand” bitcoinI wish I was smarter and wore a suit (like you) but I only work in the post office sorting the mail. On my smoking break, outside the door, none of my coworkers has even heard of bitcoin, much less understands it. I have a few friends that work for UPS I’m going to see if they understand or have heard of it. Most of us use check cashing agencies we don’t even have bank accounts. We live from paycheck to paycheck.

    3. ShanaC

      it is more like – what is money

      1. Pete Griffiths

        Good question. And one to which economists have paid some attention.

  15. Andrew Kennedy

    “As an analogy, imagine an Internet where every website used its own TCP implementation, advertising its customized checksum and packet-splicing algorithms to end users. This would not be a viable envirnment, and neither is the current environment of altchains.”- great analogy

  16. Kurt Kumar

    Local currencies have no choice but to become local regional “Sidechains” that are pegged to Bitcoin at which point it will start acting as a “Global Monetary Institution” and thus have no impact to manipulation from local monetary authorities. Although I am pretty sure that each regional authority or reserve bank in the meantime will keep on disrupting adoption for as long as possible.

    1. awaldstein

      By local currencies you mean things like the Brixton Pound and many others like it in Europe?I know for a fact that these initiatives are looking at how to use block chain but as far as Sidechains not to my knowledge.

  17. LIAD

    TL;DR – if bitcoin ever hits main street adoption its been long accepted they won’t even know they’re using bitcoin/blockchain technology. sidechains is inside baseball. it helps developers overcome limitations of bitcoin functionality.Longer version.everyone is looking for ways to augment what can be done using bitcoin whilst preserving bitcoin’s ‘relative’ simplicity, speed and efficiencies. it’s generally agreed that bitcoin itself should not be polluted with feature creep.ideas how to do this have ranged from – it can’t be done, let’s establish our own currency, to various piggybacking ideas, most of which have been slammed from one angle or another.In essence Sidechains is another attempt to solve the problem detailed above. In my opinion, it looks like a very elegant way of doing things. but, there proof is in the pudding.

    1. Andrew Kennedy

      it seems very elegant to me as well. bitcoin really can’t innovate without them.

  18. Twain Twain

    That paper defined it like so: “A sidechain is a blockchain that validates data from other block chains.”Interestingly, IBM filed a patent for their version of a block chain called a “spend chain” to validate and authenticate digital currencies.

  19. iggyfanlo

    Side chains are a brilliant concept and obviously I need to read the paper you cite, but would the side chains somehow destabilize the block chain? Or corrupt it?

    1. Jameson Lopp

      Blockstream’s sidechains proposal is that to move assets from one blockchain to another you would create a transaction on the first blockchain to lock the assets, then create a transaction on the second blockchain whose inputs contain acryptographic proof that the lock was done correctly. Thus, Bitcoin nodes will only see that there was a locking transaction from their perspective and sidechain nodes will only care about the proof-of-lock contained in the ‘genesis’ transaction broadcast to the sidechain network.It won’t be possible to corrupt a chain; Bitcoin nodes will reject any transaction that doesn’t follow the rules of the protocol.

  20. Roger Ellman

    Thanks very much for the link to the sidechains paper – most useful.

  21. Terry J Leach

    I’ve been envisioning using Bitcoin as a reserve cyptocurrency some time in the future of our platform. Sidechains seems like an excellent solution that building out the infrastructure of cryptocurrency.If implemented Sidechains could decentralize stored value, creating a wave of innovation. Very exciting time for blockchain technology.

  22. ZekeV

    The bidirectional peg is a clever technical proposal, and it could be very useful for applications that require greater transactional frequency or smaller micropayments than permitted using bitcoin directly. I could see, for example, Coinbase developing its own side chain to facilitate secure micropayments for its customers without having to eat btc transaction fees. I’m hoping that the promise of side chains that are fungible with btc payments will perhaps take some of the thunder away from crazy “core” proposals to eff with the current protocol in more destructive ways.However, this development will not significantly impact the proliferation of alt chains. Launching an alt coin with its own currency allows open source developers to capture some of the social benefit of their software (or more nefariously, to make a quick buck by dumping financial vaporware on gullible speculators). A pegged side chain that does not have its own currency lacks this economic incentive. That doesn’t mean the software will not be useful, or will not be maintained, of course. Just that there remains a powerful incentive for developers to use bitcoin clones with alternative units of account. I think we’ll see the number of alt chains continue to increase geometrically for the foreseeable future, until we’re totally saturated with millions (if not billions) of them. Eventually almost every company that produces a digital commodity (cell phone minutes, bandwidth, storage, computing cycles, …) will have its own denomination that will float in the market. This will become a more important source of liquidity than the current market for legal equity in corporations.

  23. falicon

    If nothing else, I give you credit for doing your best to single handedly will BitCoin into significance. 🙂

  24. LE

    I believe that the core Bitcoin system and software will have to be modified to allow these “pegs” and I’m pretty sure (but not positive) that these changes have not yet been made.I’m sure someone else in the comments has said this already but the above seems to contradict this:2) The core Bitcoin system and software is not likely to change very much because making changes to it is risky and there is a lot of capital at stake on the Bitcoin blockchain now.I think when you are talking about something that is to big to fail making any change or modification presents to much risk. Which is what you were saying with #2 above.

    1. Tom Raines

      I heard Adam Back and Austin Hill comment that this change could be the one change to rule them all because it enables limitless innovation without needing speculation.

  25. Emily Merkle

    meta totes meta.

  26. thibauld

    Just read the 86+ comments and I am surprised that no one challenged the underlying assumption of Sidechains which is that Bitcoin will remain kind of the “center of the universe” for cryptocurrencies.Fred defends it saying that “[it] is likely to remain that way given the network effects it has built up over the past five years”. Sure enough, Bitcoin has shown the way when it comes to cryptocurrencies and the blockchain decentralized trust paradigm but I personally would question Bitcoin’s long term future. Mining the Bitcoin blockchain will retribute miners less and less over time while miners will need to continue investing a lot to stay ahead of the game. The opportunity cost of miners to continue mining bitcoin is not that high and I guess it will be easy for them to switch if another blockchain starts showing momentum. Keep in mind that Bitcoin has no real challengers as of today: the most expected altcoins (I’d say bitshares, ethereum, maidsafe…) either haven’t launch or are in their extreme infancy.In my opinion, the right question about sidechains is more: Will sidechains enable the bitcoin blockchain to maintain its attractiveness to miners on the long term? Hard to tell. Imho, the best scenario for sidechains would be to provide an smooth upgrade mechanism for Bitcoin, thus allowing bitcoin to slowly evolve and address its limitations over time. You would then have different blockchain versions and miners could easily switch from one blockchain to the upgraded one without putting their assets at risk.

    1. ShanaC

      how about when quantum computers become a norm…then what

      1. Pete Griffiths

        What’s your thought here, Shana?

    2. Pete Griffiths

      I agree. But it’s not just a matter of the miners.’ The technical debt and inefficiencies of a kludged ‘solution’ to the blockchain may constitute enough of a problem to warrant a ground up redesign.

    3. Simon Edhouse

      Its not so much an ‘assumption’, but a desired outcome… and sidechains can do a lot of good if they help to strengthen the core of Bitcoin rather than a scenario where alt coins continue to fragment the ecosystem. Alt coin experimentation can still occur, but much better if its double pegged to Bitcoin. Worrying about pro’s and con’s for miners is not as important as pro’s and con’s for all users, and experience of the general public.

      1. thibauld

        I totally get your point but I disagree with your argument about altcoins fragmenting / weakening the ecosystem, it is because altcoins projects are popping up everywhere that I am confident that cryptocurrencies have a bright future. Bitcoin, in this aspect, is very comparable to the evolution of Linux. Slackware, probably the main Linux distribution in 1993, is no longer the most popular Linux distribution nowadays… and nobody cares. Behind Linux, it is the open source paradigm that was important. The same applies to Bitcoin: it is the blockchain paradigm that is important and will thrive, with or without Bitcoin being his flagship.Granted, the drawback of all this fragmentation is that “Linux on the Desktop” (i.e. my mother knowing what Linux is and using it everyday) never became reality in the pure sense of the term. People are using Linux without knowing it through Android, Google, Facebook… and I am willing to bet that the same will happen in the blockchain ecosystem. A fraction of people will actually use crypto-currencies directly but billions will benefit from it indirectly through services that are yet to arrive on the market.

        1. Pete Griffiths

          Totally agree. And we don’t even know yet if cryptocurrency is the most important application for blockchain technology. Distributed trust is a big idea.

        2. Simon Edhouse

          The issue of fragmentation is referred to and explained quite well in the Sidechains PDF, (infrastructure & market fragmentation) Refer: Introduction lines 81 & 93., also perhaps read my essay in Bitcoin magazine: http://bitcoinmagazine.com/… about the ‘zero marginal cost economics’ issue, and what I referred to as: ‘The inevitable search for a multiplier, in a realm where copies cost nothing’.The issue is, there clearly will not be ever increasing demand for the innumerable coins created. Because they are also typically not created with scarcity in mind (unlike Bitcoin). Which means, many people will be buying into something that will never appreciate in value, and even if ‘whatever coin’ is in demand, the buyer has to find someone else to trade it to, to be able to recoup anything. Also, collectively, all these alt-coins will be subject to ‘power law’ distributions, (some might be popular, but many not). So, its easy to see that over time, inequity and loss will be common, and successes more and more scarce in relative terms. This will cause the fragmentation I was referring to, and risk stigmatizing the whole field.

    4. timrpeterson

      Bitcoin subreddit has +140k users, Ethereum has +3k. Despite it seeming super cool and impressive, there just isn’t a significant community developing around Ethereum. Bitshares/Maidsafe are even worse. And you can’t make the case that Ethereum is newer as its been around longer than the Dogecoin community and that has 80K users.I want to care about the alt-coins, especially Dogecoin, I just agree with @fredwilson:disqus and @cdixon that only Bitcoin has the network effects going for it. Super developers being behind the sidechain concept, see e.g., blockstream.com, will only further the gap.

      1. Pete Griffiths

        It’s a fair point.

  27. ShanaC

    So the ledger is interesting – but what we do with ledgers can really screw up relationships fast.OTOH – putting things in public that are transacational and not relational is a good idea

  28. TSC

    This is a derivative for Bitcoin.

  29. Pete Griffiths

    I’m a bit skeptical about this. The technical problems that require a rethink of the data structure that Bitcoin calls the blockchain are very real. But pegging, despite the liquidity benefits, is a kludge It’s blockchain 1.5. not blockchain 2.0. What would be better is a convincing application that makes use of a better blockchain. Let’s see if Elysium, for example, can come up with something.

  30. McGee Young

    This is really interesting. I wonder if you could you use a Sidechain to set up a decentralized power grid, but keep it pegged to Bitcoin for price stability? So, as a producer of electricity, each watt of electricity that I produce would be accompanied by a sidechain ledger entry. Each sequential switch on the grid could place a claim on the chain until the watt was claimed by an end user via a meter. At that point the transaction would be closed and the value of the watt awarded to each node along the grid and back to the originator. The inefficiencies of the grid could then be priced into the algorithm to reward local production and consumption. And the sidechain could support its own growth by allowing each piece of the grid to conduct mining operations. You would want the peg to Bitcoin to set the price of the electricity. But at that point, you could have unlimited participation and price transparency in energy production and distribution. And as a consumer you could select to only buy renewable energy or only the lowest cost or whatever your preference.

  31. stefano zorzi

    Hi Fred, have you read this http://gendal.wordpress.com… ?So far it is one of the best explanation of the entire sidechains discussion. I like in particular the role that sidechains could have in replacing centralised wallets (circle, coinbase) which practically act as imperfect sidechains (i.e. creating some of the benefits but at the expense of the decentralisation and security of bitcoin blockchain). I guess you might not be in a position to comment on this but I would be interested in knowing your take on the long term sustainability of centralised services which practically are meant to be replaced by the distributed nature of bitcoin (once adoption is higher).

  32. Guest

    AAAHHH slow down with the side-chain talk, I’m not done with my thing yet.

  33. FreeJack

    Litecoin hasn’t achieved significant liquidity or mining? You have your head in the sand. It is where Bitcoin was, this time last year.

  34. ZekeV

    The “peg” in this case means that a unit of bitcoin currency is locked on the main blockchain (cannot be spent), and a corresponding unit of bitcoin-denominated currency is created in an alternative blockchain (a “side chain”). Is it possible that a side chain bitcoin would trade at a discount? I suppose so, but assuming that the technical means of converting it back into main bitcoin works, I would expect any discount to be very slight. I have other criticisms of the dual pegged side chain economics, though, which I’ll post above after I collect my thoughts.

  35. ZekeV

    Right, it’s like the gold standard, but an early one in which the currency is 100% backed. Your sidechain bitcoin is redeemable for a real bitcoin, which is verifiably set aside by locking. Side chains would only increase volatility if sidechain bitcoin was less than 100% backed, or if the locking process was flawed.

  36. kidmercury

    the gold standard was predicated on government’s fixing the value of gold/dollar exchange rate. there is no one to fix the exchange rate in the bitcoin universe, which is its ultimate problem.

  37. ZekeV

    I think if I were going to hold any considerable amount of wealth in a pegged side chain, there would be no reason not to convert it immediately into main chain bitcoin. For example, let’s say there’s a pegged side chain set up just for the purpose of recording btc-denominated positions at Mt Gox 2.0. As I settle a trade, I’ll likely want to take out my btc immediately. However, if the side chain fails (resulting in loss of actual btc which is now permanently locked) a large enough failure could perhaps impact overall btc market.

  38. SubstrateUndertow

    What standardizes the trusted digital-policing-protocols at work within any given sidechain’s uniquely experimental blockchain mechanisms ?Or is it a “buyer beware” sidechain free for all ?

  39. ZekeV

    The point is that pegged side chains can transfer bitcoin value using a non-bitcoin software stack. Thus any risk is contained to people who participate in the side chain. Why would I agree to lock a perfectly good bitcoin in exchange for a bitcoin-denominated alt chain token? That is a good question!