How Pegged Sidechains Can Solve the Problem of Transacting Across Blockchains

Recently BlockStream released a teaser about an innovative new technology called “pegged sidechains” that would allow public ledgers of various cryptocurrencies to transfer between multiple blockchains. The whitepaper describing this new technology has just been released by BlockStream today. The white paper describes the central idea, its implementation requirements and the things that need to be done to get the most benefit from fully implemented interconnected blockchains.

“We propose a new technology, pegged sidechains,” reads the abstract, “which enables bitcoins and other ledger assets to be transferred between multiple blockchains.” It continues:

“This gives users access to new and innovative cryptocurrency systems using the assets they already own. By reusing Bitcoin’s currency, these systems can more easily interoperate with each other and with Bitcoin, avoiding the liquidity shortages and market fluctuations associated with new currencies.

 “Since sidechains are separate systems, technical and economic innovation is not hindered. Despite bidirectional transferability between Bitcoin and pegged sidechains, they are isolated: in the case of a cryptographic break (or malicious design) in a sidechain, the damage is entirely confined to the sidechain itself.”

Digital Currencies started with the work of David Chaum in 1983 in preventing the problem of “double-spend.” Chaum however, was using a central server, a problem rectified by Nakamoto in 2009 when he replaced the central server with a consensus based mechanism that was founded on “proof of work” that gave economic incentives for cooperation.

The problem, according to the white paper, is that tradeoffs need to be made if blockchains are to be decentralized and scalable, secure and cost effective and the tradeoffs must be made for each transaction because of the wide variance between them. They also commented that because of these tradeoffs, Bitcoin could be more powerful, allowing functions such as smart contracts, or less powerful to make editing easier and more cost effective.

Several of these problems have been addressed by alternate blockchains like Ethereum, but we then run into infrastructure fragmentation because each altchain has its own technology stack which causes some efforts to be either duplicated or lost completely. These altchains also often have their own floating coins, which act to confound the issue further because of price shifts as users of the chain are forced to rely on exchanges, increasing their risk several fold.

The solution to some of these problems is what developers is calling inoperable blockchains, or pegged sidechains that come in two different forms: Symmetric and Asymmetric sidechains.

Symmetric side chains allow users to transfer parent chain coins to side chains coins that can only be unlocked with SPV proof of possession on the sidechain. Asymmetric or Symmetric Two-Way Peg simply makes the SPV proof of possession two-way, requiring it from both parent and sidechain.

Unsurprisingly, developers explain that this fledgling system is not without it drawbacks. First, they add another level of complexity to an already complex system as there will be multiple independent unsynchronized blockchains supporting transfers between each other. They must also support scripts, which can later be invalidated by a later reorganization proof.

Also, under the current paradigm, we have one chain, one asset, which will change to many chains, many assets. This means that we will need additional software to detect malicious tampering more effectively. These are problems that cannot be addressed in the blockchain itself without addressing user interfaces within current wallet technology.

We all know that Bitcoin and other cryptocurrencies are still in their infancy and much improvement can and should be made. Pegged sidechains seems to have a great deal of potential but obviously needs a great deal of work yet before adaptation can be considered on a wide scale. 

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