According to Brave New Coin, Blockstream’s federated sidechain for Bitcoin companies, known as Liquid, is scheduled to launch in early 2018. A possible side effect of this sidechain is a decrease in the demand for block space on Bitcoin’s main chain.Sidechains promise to help Bitcoin adapt to new demands and accommodate new innovation, according to the company behind the seminal sidechain whitepaper, Blockstream. Several different companies have been developing the idea since Blockstream introduced the concept in an October 2014.
“We propose a new technology, pegged sidechains, which enables bitcoins and other ledger assets to be transferred between multiple blockchains,” states Blockstream in the paper, Enabling Blockchain Innovations with Pegged Sidechains. ”This gives users access to new and innovative cryptocurrency systems using the assets they already own.”
Blockstream describes sidechains as blockchains that allow users to transfer assets to and from other blockchains. As sidechains are fully-independent chains, they are able to implement a variety of different features, such as block structure or transaction chaining. The whitepaper posits that 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.
The key to blockchain interoperability is the transfer of assets, known as the “two-way peg.” The peg works by locking the assets in a transaction on one chain, making them unusable there, and then creating a transaction on the sidechain that describes the locked asset. Effectively, this moves assets from a parent chain to a sidechain.
One of the fundamental roadblocks in deploying sidechains is that the Bitcoin blockchain is not currently capable of executing the required verification rules for a two-way peg. Blockstream describes changing the protocol as “non-trivial,” and the process of implementing similar changes was part of the motivation for pegged sidechains to begin with.
However, Blockstream postulated that it is possible to do an initial deployment in a completely permissionless way, using a two-way peg described as a “federated peg”. In January 2017, Blockstream released a second paper, Strong Federations: An Interoperable Blockchain Solution to Centralized Third-Party Risks. The document expands on the federated peg, and introduces a detailed version called Strong Federation, while describing a Strong Federation sidechain implementation called Liquid, “the first market implementation of the system.”
“With Liquid in place, we believe Bitcoin will be in a stronger position to attract institutional trading firms and brokerages, as well as address global liquidity and pricing data challenges faced by these players interested in bitcoin as an asset class. That will be a major milestone for Bitcoin, bringing many new users and applications to the industry.”
- Samson Mow, Blockstream Chief Strategy Officer
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