The seminal Bitcoin sidechains white paper “Enabling Blockchain Innovations with Pegged Sidechains,” released in 2014 by a team that went on to form Blockstream, a leading company in the blockchain space, envisaged an ecosystem of “sidechains” separate from the main Bitcoin blockchain but interoperable with it via peg mechanisms.
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. A sidechain can implement more powerful scripting features or more watertight privacy. Increased throughput is another key improvement over Bitcoin that can be implemented in a sidechain.
In 2015, Bitcoin Magazine covered Blockstream’s plans for the first commercial Bitcoin sidechain, code-named “Liquid,” able to provide instant transactions with a fast settlement layer for bitcoin exchanges, brokerages and other industry members. “As its main advantage, Liquid provides instant and secure transactions among all users of the sidechain,” claims Blockstream. “While Bitcoin transactions can typically take up to an hour to be sufficiently secured by the blockchain, Liquid offers a similar level of security within seconds.”
Now Blockstream has released another white paper, titled “Strong Federations: An Interoperable Blockchain Solution to Centralized Third Party Risks.” The new white paper introduces improvements over the federated peg mechanism mentioned in the first white paper. In particular, the consensus mechanism and trust model have been updated; mechanisms that allow settlement back to a parent chain in case of failure have also been introduced.
In essence, Strong Federations are cleverly constructed multisig addresses, where bitcoins are “locked in.” These bitcoins can be unlocked only if enough key holders agree the payment is valid. This setup can make for publicly verifiable, Byzantine-robust transaction networks that facilitate movement of any asset among disparate markets, without requiring centralized trust in any single party. It can also provide commercial privacy, with support for transactions where asset types and amounts are opaque while preserving the public verifiability inherent to Bitcoin.
The new white paper consolidates and expands the initial concept of Liquid, which is now presented as a first implementation of a Strong Federation. “The first working implementation of a Strong Federation is Liquid — a Bitcoin exchange and brokerage multi-signature sidechain that bypasses Bitcoin’s inherent limitations while leveraging its security properties,” note the authors. In Liquid, “consensus history is a blockchain where every block is signed by the majority of a deterministic, globally-distributed set of functionaries running on hardened platforms, a methodology that directly aligns incentives for the participants.”
According to Blockstream, Strong Federations will be useful in many general-purpose industries, especially those that need secure and private exchange of digital assets, without a single party that controls the custodianship, execution and settling of transactions.
“This new construction establishes a security profile inherently superior to existing methods of rapid transfer and settlement among exchanges and brokerages, and is directly applicable to other problems within existing financial institutions,” note Blockstream experts Johnny Dilley, Jonathan Wilkins and Marta Piekarska, co-authors of the white paper.
It’s worth noting that, contrary to the current trend toward sanitized, “permissioned” non-Bitcoin blockchains that deliberately disown the libertarian attitude of early Bitcoin adopters, the Blockstream approach remains anchored to the public Bitcoin blockchain and informed by a commitment to privacy and liberty.
“Our efforts focus on developing systems that protect individual liberty through cryptographic mechanisms as the right to privacy is one of the essential components of a free society,” the authors of the white paper state. “Liquid and Strong Federations attempt to improve upon the privacy guarantees offered by Bitcoin, whose open-by-default model often results in users inadvertently leaking personally-identifying information.”