This last summer Adam Back, developer of the Bitcoin algorithm HashCash, and Austin Hill, founder anonymous networking and privacy technology company Zero-Knowledge Systems, teased the idea of Bitcoin sidechains: a mechanism for transferring Bitcoins to a separate-but-connected blockchain that can be used like an alt-currency but has its Proof of Work and value entangled with Bitcoin. This is done via a mechanism called pegging which means that the sidechains security and scarcity is tied directly to (backed by) Bitcoins blockchain.

Yesterday, the sidechain whitepaper was released [PDF] for the Bitcoin community to review. The list of authors includes a staggering number of coding luminaries: Adam Back, Matt Corallo, Luke Dashjr, Mark Friedenbach, Gregory Maxwell, Andrew Miller, Andrew Poelstra, Jorge Timn, and Pieter Wuille.

Black we already know. Maxwell and Wuille are Bitcoin core developers. Luke Dashjr is a regular contributor to bitcoind and Bitcoin-Qt and maintains mining software. Corallo wrote the BitcoinJ Open Source Library.

For more information on sidechains, see todays Reddit AMA with Black, Maxwell, et al.

From the abstract of Enabling Blockchain Innovations with Pegged Sidechains:

We propose a new technology, pegged sidechains, which enables bitcoins and other ledger assets to be transferred between multiple blockchains. This gives users access to new and innovative cryptocurrency systems using the assets they already own. By reusing Bitcoins 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.

Since sidechains permit the construction of alternate blockchains that are backed by Bitcoin, it will open up the possibility for clients to allow for numerous different functionalities without the fragility of developing a brand new altcoin.

Alternate currencies (aka altcoins) are often produced to provide proof-of-concept or diverge an idea from Bitcoin. Some do this to try to produce a better Bitcoin, others to add functionality, or to develop totally different functionality (Namecoin), and yet others because of sheer whimsy (Dogecoin).

During todays Reddit AMA, Peter Wuille gave his thoughts on what he thinks sidechains will do for Bitcoin.

He believes that sidechains could provide [a] place to try out new ideas, and show their virtue to the community, before arguing they should be incorporated into Bitcoin proper (which would upgrade the security).

The rest is here:

Bitcoin pegged sidechains whitepaper reveals new horizons for cryptocurrency