Adam Back, co-founder and chief executive officer of Blockstream Corp., speaks at the Group of 20 ... [+] high-level seminar on financial innovation "Our Future in the Digital Age" on the sidelines of the G20 finance ministers and central bank governors meeting in Fukuoka on June 8, 2019. (Photo by Kiyoshi Ota / POOL / AFP) (Photo credit should read KIYOSHI OTA/AFP/Getty Images)

Tomorrow (a few hours from now), it will have been exactly five years since the original white paper on Bitcoin sidechains (PDF) was released. The basic idea explained in the paper was that Bitcoin users would be allowed to move their coins between multiple, completely different blockchains that could enable a wide range of new cryptocurrency features.

The end result of this functionality would theoretically be an end to the many altcoins that existed on the market at the time, as there would no longer be a legitimate reason to create a new cryptocurrency in an effort to experiment with new features. Instead, new features that were sufficiently complex could come to Bitcoin by way of sidechains.

Today, sidechains do exist, but they come with trade-offs in the areas of centralization and censorship resistance at least for now. At the recent Transylvania Crypto Conference, a panel of experts on the topic, including Blockstream CEO and sidechains white paper co-author Adam Back, discussed the current state and future potential of sidechains for Bitcoin.

The End of Altcoins?

Despite the hype around Bitcoin sidechains, altcoins still very much exist. In fact, Ethereum briefly surpassed Bitcoin in terms of transaction fees collected by miners per day around the start of October (although that may not mean much for the ETH price).

That said, Back is still bullish on the idea that sidechains will eventually diminish the attractiveness of alternative cryptocurrencies.

In the history of altcoins, it seemed like there was a period where there were a huge number of them that had no features, said Back at the Transylvania Crypto Conference. And that played out. And then people started to need a new way to market them, so they added features. Some of them were real features, and some of them were stories to market [their altcoins].

Back added that making Bitcoin more modular could allow developers to more easily bring new features to the peer-to-peer digital cash system, but there is a problem with incentives when it comes to altcoins versus sidechains. Those who are motivated by money are incentivized to create an altcoin rather than simply innovate on Bitcoin.

This financial incentive will remain, but it will have less credibility because if you have a very easy to use extension mechanism for Bitcoin and examples of extensions that do something simple that you can build on, theres not really a good story about why youre doing it somewhere else, explained Back.

In Backs view, the development of the internet would have been as distracted, disorganized, and confused as the evolution of Bitcoin if everybody was making forked copies of TCP/IP with slight tweaks rather than simply pushing forward with one unified protocol stack.

Back also added that sidechains arent the only solution here. This concept of building on Bitcoin and weakening the viability of altcoins can be applied to layer-two protocols built on top of Bitcoin more generally. In the past, many have argued that Bitcoins Lightning Network makes altcoins focused on fast, cheap payments look rather pointless.

Making Better Sidechains

The versions of sidechains that exist today arent exactly trustless. Blockstreams Liquid sidechain puts control of the funds on the sidechain into the hands of a federation of Bitcoin exchanges, traders, and other financial institutions. An alternative system known as Drivechain, which has been developed by Bitcoin researcher Paul Sztorc, would put miners in control of the funds on the sidechain, but enabling this type of sidechain would require a soft-forking change to Bitcoin.

Your risk with Bitcoin is that, ultimately, the coins are escrowed in some way in a somewhat decentralized way, Back explained at the Transylvania Crypto Conference. If its merged mined, the miners, collectively, could take them against the protocol, or if its in some kind of HSM-assured multisig, somebody could go hack two-thirds of the HSMs.

Of course, these trade-offs are often viewed as acceptable, especially when the vast majority of Bitcoin's competitors seem to miss the point of why Bitcoin was created in the first place.

At a developer meetup last year, Blockstream Mathematician Andrew Poelstra stated that, in his view, the high degree of centralization in the Bitcoin mining industry made some previously-envisioned forms of sidechains untenable. However, Poelstra is also of the belief that zero-knowledge proofs may eventually be the way forward for this technology.

Back touched on zero-knowledge proofs during his appearance at the Transylvania Crypto Conference, although he indicated this technology may be some years off from being ready for use in sidechains.

Thats an enormous proof, and all of the current proof systems are orders of magnitude away from being able to do that, and some of them make experimental security assumptions, said Back. Maybe the bulletproof-like security and scalability will improve enough, and then we can make general, fully-secure sidechains just by having the main chain block verify a list of them. That would be very nice.

The Blockstream CEO also covered the potential of so-called extension blocks, which Back brought up as a potential solution during Bitcoins massive block size debate back in 2015. Specifically, Back noted this option could allow users to opt into advanced privacy features; however, he added that there are also serious risks, such as the potential for an accidental chain fork, associated with adding experimental cryptography to Bitcoin in this way.

In the past, extension blocks have also been criticized as effective block size increases, but Back said this drawback can be avoided by implementing a unified limit for the extension block and Bitcoins main blockchain.

Finally, Back also mentioned Blockstreams Simplicity programming language as potentially useful for the deployment of sidechains on Bitcoin.

With that, you have enough guarantees of determinism that you could implement the sidechain rules in Simplicity and verify it in Bitcoin and be pretty sure that its not going to diverge, said Back. But, youve still got the size argument.

While trustless sidechains on Bitcoin may still be quite a few years away, there are other layer-two protocols, such as federated sidechains and the Lightning Network, that allow Bitcoin to gain the features of the most popular altcoins right now albeit usually with security trade-offs. These additional protocol layers will likely become relatively trustless eventually, as advancements in cryptography are made over time.

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When Will Bitcoin Sidechains Send Ethereum, Ripple, And Other Crypto Prices To Zero? - Forbes