
Bitcoin 2.0: Unleash The Sidechains - RougeFemme
http://techcrunch.com/2014/04/19/bitcoin-2-0-unleash-the-sidechains/
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rdl
I'm a big believer in cryptocurrencies, but blockchains have limited utility
for many asset classes.

Blockchains have a few serious disadvantages over other protocols (chaumian
blinding, or just signed receipts, or a central ledger) -- inefficiency, lack
of privacy (zerocoin addresses this, but at the cost of incredibly advanced
mathematics), and the 51% attack.

Essentially, anything which is inherently centralized has no business being on
a blockchain. This is really anything backed by a physical asset -- the ideas
to do colored coins which were gold warehouse receipts were insane/inane. Most
of the sidechain proposals I've seen are equally absurd -- the idea of
equities issued in a blockchain where the equities are essentially tied to a
single real-world issuer is an unnecessary step. You could just have the
entity issue digital shares using a centralized protocol; non-repudiation
works just as well with signatures. (you might use a distributed system for a
virtual corporation of some kind, but that's an exception).

Bitcoin itself makes sense (it's a decentralized store of value), and some of
the smart contracts stuff might make sense (but the smart contracts cease
being self-enforcing, and thus smart, as soon as a lawyer or government gets
involved...), but most of the sidechain proposals involve trying to recreate
assets from off the blockchain in a less efficient, less secure way, just to
prop up the value of bitcoin itself.

There's no reason to use a smart contract to "prevent issue of too many
shares" \-- you can just have the market price shares based on what the market
believes is the outstanding treasury and float. People can build systems to
provide better controls there, which might in some cases involve the
blockchain, but it's not essential -- we can price assets using a market with
imperfect information already.

A system with ~infinity of distinct issues, traded in realtime on market(s),
with perhaps something like bitcoin as a unit of account, makes a lot more
sense to me than trying to have one global currency (bitcoin) and then doing
things like sidechains (which don't let you escape the limitations of the
blockchain protocol).

~~~
wyager
>or a central ledger

Yeah, a central ledger works great if you want none of the benefits that
Bitcoin offers.

>Essentially, anything which is inherently centralized has no business being
on a blockchain. This is really anything backed by a physical asset

Bitcoin has proven that decentralized assets have huge advantage. Your
starting assumption is wrong; wealth is not inherently centralized, and assets
are not inherently centralized.

~~~
haakon
The problem is that you can't just take an inherently centralised asset and
sprinkle some blockchain on it to make it decentralized. If an asset is backed
by a vault of gold bars, it is inherently centralised because the gold is in a
central location and has counterparty risk as well as being prone to
confiscation.

In this case, there is no point in representing the asset in a blockchain. The
blockchain is probably the least inefficient datastructure we have seen in
modern times. A centralised asset is much more efficiently represented by a
centralised ledger. You can still use triple-ledger accounting.

~~~
baddox
> If an asset is backed by a vault of gold bars, it is inherently centralised
> because the gold is in a central location and has counterparty risk as well
> as being prone to confiscation.

This sounds a bit like saying that Bitcoin is inherently centralized because
someone can physically hold a gun to your head and compel you to turn over all
your coins. I think there are still benefits to a blockchain approach, even if
the represented asset is "centralized."

~~~
rdl
With a ledger, you don't get non-repudiability. No transferability if the
ledger is down. Does nothing for redemption risk.

With a signed token (optionally blinded), you get non-repudiability, but if
the central exchange is shut down, you don't have safe transfers (it becomes
impossible to prevent double spending, so you probably do a single payment to
a trustworthy entity and get new tokens from elsewhere). Does nothing for
redemption risk.

With blockchains, you have non-repudiability (although less strong than the
signed tokens, due to 51% double spend attack being easier than defeating RSA
4096 or whatever), and continue with transferability even in the face of
issuer failure, but still have redemption risk (if it's a "backed" currency).

Arguably sidechains give you non-repudiability, eternal transferability, and
no redemption risk (at least back to bitcoin). However, it only makes sense
for things which are anchored in the root blockchain (i.e. ultimately bitcoin
derivatives of some kind); it doesn't make sense for gold bars.

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josephagoss
If you read Vitalik's post it'll give a very good run down on side chains.
[http://bitcoinmagazine.com/12349/side-chains-challenges-
pote...](http://bitcoinmagazine.com/12349/side-chains-challenges-potential/)

Sidechains have issues in the current incarnation that we have been shown;
they need to be mined and a 51% attack on Bitcoin will enable the miner to
gain access to the coins that are in the Bitcoin blockchain waiting for
release via the two way peg.

If these issues cannot be solved then Vitalik may be correct that Ethereum
based side chains might actually be a better way as it seems Ethereum is
designed to handle this type of advanced contract.

Either way, whatever coin (bitcoin or ether) implements these side chains
safely and correctly will likely win as being the foundation for the future of
cryptocurrency/platforms.

The side chain idea allows the native cryptocurrency to compete and win out
over other competitors. Want faster confirms? Use side chains. Want Zerocash
anonymous transactions, peg into Zerocash and peg back out again. I believe
the future will be a battle between Bitcoin and Ethereum with a major war zone
being sidechains.

Also consider this: If cryptocurrency can have on top of itself many other
applications built (decentralised: {web hosting,web app hosting, databases,
information, computing engines: {search, math, compute}, contracts, code})
then does that coin itself eventually gain 'intrinsic' value via being the
foundation of all these new systems?

Imagine a TOR that is based entirely on the greed incentive and not just good
will, where the entire system is an Ethereum contract. Imagine an open source
google search where the code is run entirely on top of the nodes and each
search costs 1 cent in ether to be paid to the nodes for hosting and running
the code.

If this happens, that coin becomes pegged to a brand new internet running on
top of blockchains. Just something to think about.

~~~
aaron-lebo
Sidechains are being a little overhyped, certainly in the Bitcoin scenario.

Part of what drives altcoin innovation is the chance for profit (I guess this
drives a lot of innovation). Since Bitcoin sidechains are pegged 1-1, there is
no chance for a lot of profit on each sidechain. So if you are starting a new
altcoin, what are you more likely to do, create a sidechain where you can't
make any money or create a separate currency with all kinds of potential?

In fact, much of the same incentive is what is driving the desire to make
everything a sidechain. People who are invested in Bitcoin want to keep
interest and value there, which is more difficult when altcoins pop up. But
why should Bitcoin be _the_ currency, other than it was there first? When you
look at some of the PoS coins which are energy efficient and have 10 second
blocks compared to Bitcoin's energy-using mining and 10 minute blocks, you
have to wonder what would be a better tech going forward (and yes I know about
the possibility for attack on PoS coins).

But thankfully, we don't have to put all our eggs in one basket. The current
system where multiple exchanges exist where you can go from one coin to
another very quickly seems to work pretty well. Does everything need to be
pegged to a single currency?

Second, people need to realize that you can't easily decentralize everything
using Ethereum (when it exists). Each node will have a relatively small amount
of memory and computing power on it in comparison to more centralized servers
and will be slower/more expensive for the same reason. So one example people
have used are decentralized exchanges. Wouldn't it be nice instead of having
centralized exchanges which can be hacked, corrupt, etc (MtGox), just make
them a contract on Ethereum? Sure, if you are okay with making each
transaction on your decentralized exchange relatively slow and expensive
compared to a good centralized exchange.

These kinds of issues will be run into more and more once Ethereum is usable.
A lot of things would have seemed like a good fit for decentralization but it
is just easier and makes more sense to build a centralized service. Of course
Ethereum also will open up a lot of unforeseen avenues as well.

Thing is, sidecoins, Ethereum, etc, don't exist (at least not as a live,
fully-functioning implementation). Most writings about either right now are
"this is what will be possible", "this is what can happen", the dreaming
stage. We need to see these things out in the wild to get past hype to
reality.

~~~
josephagoss
Very true, we don't need everything to be pegged to a single currency. Another
development that will make moving between crypto-currencies more fluid will be
decentralized exchanges.

I believe that apart from Counterparty and ColoredCoins, Ethereum may also be
able to run as a decentralized exchange in fact helping Bitcoin and the other
Alternative coins.

I assumed a long time ago that eventually many of these coins will somehow tie
into each other in the process of building the future foundations of a new
decentralised internet. I think that time is coming.

~~~
jafaku
> Very true, we don't need everything to be pegged to a single currency.
> Another development that will make moving between crypto-currencies more
> fluid will be decentralized exchanges.

That's not the point. The point is knowing that you won't lose money by trying
out altcoins. With sidechains, at any point you can claim back your original
bitcoins. You won't be left holding the bag as it happens all the time with
separate blockchain altcoins.

~~~
healingplasma
> You won't be left holding the bag

Yeah, unless it's 51% attacked in which case you would lose everything.

------
slasaus
An interesting and related article is this one by Paul Bohm from 2011:
[http://paulbohm.com/articles/bitcoins-value-is-
decentralizat...](http://paulbohm.com/articles/bitcoins-value-is-
decentralization/)

His conclusion: "Is there value in Bitcoin? Let me ask a counter question: Is
decentralization valuable? If you think that we'll increasingly lose trust in
the central authorities that manage the infrastructure we rely on, you might
expect Bitcoins to rise a lot in value. If not, that is you believe that
authorities will be able to tackle the challenges of the future better in
centralized form, then from your perspective Bitcoins don't add value. We'll
see."

~~~
jafaku
How is that conclusion interesting? It's the whole point of Bitcoin. And there
are no "challenges" for the authorities in this regard. The current system is
working as intended. Inflation and other evils are not forces of nature, as
politicians very frequently try to imply in their speeches.

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chm
Shameless, but I wrote something concerning this a while back[1] if it
interests anyone.

[http://www.belmarca.com/2014/02/26/mt-gox-failure-and-
opport...](http://www.belmarca.com/2014/02/26/mt-gox-failure-and-opportunity/)

------
jabgrabdthrow
Power grab by Bitcoin old money. Let's put all alternate chains on SHA256
miners with two-way BTC pegs but also let's not enable generic cross-chain
trading. Sigh =[

