Bitcoin 2.0: Unleash The Sidechains

“Cryptocurrencies will create a fifth protocol layer powering the next generation of the Internet,” says Naval Ravikant. “Our 2014 fund will be built during the blockchain cycle,” concurs Fred Wilson. And Andreessen Horowitz have very visibly doubled down on Bitcoin.

Even if you don’t believe in Bitcoin as a currency, and I’ll grant there’s plenty to be skeptical about, you should be thinking: huh, a lot of extremely smart and successful people think that its underlying technology is a pretty big deal. But as I wrote myself just a few weeks ago, there’s a big difference between blockchain technology and Bitcoin itself, right?

…Maybe not.

A brief technical refresher: “blockchains” are the distributed-consensus technology introduced to the world by the mysterious Satoshi Nakamoto, wherein a peer-to-peer network is used to codify and cryptographically verify transactions, without any central authority. What’s more, transactions can be orchestrated by programmable contracts.

Bitcoin is both the first and most successful blockchain application, but there are many, many other “cryptocurrencies,” known as “altcoins.” What’s more, there are numerous other, non-currency applications being built on new blockchains, notably Namecoin and Ethereum, and several proposals for expanding and evolving Bitcoin itself, eg ZeroCoin, MasterCoin, Colored Coins, etc.

I realize this all sounds like abstruse hair-splitting to those not yet mentally invested in cryptocurrencies; but as Ravikant put it at TC Disrupt seven months ago:

…so, continuing that metaphor, imagine for a moment that it’s 1995 and you’re just beginning to notice that, over the last year or two, those weird crusty techies who sit in the corner have all started talking excitedly about “HTTP” and “HTML” and “cookies” … which apparently power this thing called the “web.”

So. We’ve got Bitcoin and its blockchain; and we’ve got scores if not hundreds of other blockchains, powering various altcoins and Namecoin and (soon) Ethereum et al. But blockchains, like social networks, benefit from a network effect. The most popular becomes the most resilient, the most powerful, the most valuable; and Bitcoin’s blockchain is, by far, the big dog today. These two facts have provoked a certain amount of anti-altcoin vitriol.

On the other hand, other blockchains are where most of the interesting innovation is happening. Namecoin as a DNS replacement; Ethereum as a generic platform for any kind of blockchain technology; hopefully some kind of blockchain replacement for X.509 certificates; SolarCoin for solar power; Dogecoin for those of us who love absurdism for its own sake; etc etc etc. The Bitcoin blockchain, despite/because of the megawatts of power poured into it, has grown sluggish and slow to change, a victim of its own success, which impedes the pace of innovation…

…or so I thought, until I met with Austin Hill and Adam Back. Hill is the former founder and CEO of Zero-Knowledge Systems, a multi-million-dollar startup that was a good 15-20 years ahead of its time; Back is the inventor of the Hashcash algorithm which powers Bitcoin. They have considerable credibility, in other words — and they’re building a stealth “Blockchain 2.0” startup, based in part on the notion of “sidechains.”

Sidechains are new blockchains which are backed by Bitcoins, via Bitcoin contracts, just as dollars and pounds used to be backed by cold hard gold. You could in principle have thousands of sidechains “pegged” to Bitcoin, all with different characteristics and purposes … and all of them taking advantage of the scarcity and resilience guaranteed by the main Bitcoin blockchain, which in turn could iterate to implement experimental sidechain features once they have been tried and tested.

If sidechains take off, though — which will require some changes to the core Bitcoin protocol — this probably bodes ill for the existing altcoins. Not surprisingly, the proposal has attracted a fair amount of skepticism, not least from Vitalik Buterin, the chief scientist of Ethereum, who argues that sidechains require not just protocol changes but “the permission and active assistance of 50% of all Bitcoin mining pool operators.”

Why should you care? Two main reasons. One: because if Ravikant, Wilson, Andreessen, Hill, Back, etc. are correct, then in the long run, blockchain-backed cryptocurrencies could become the substrate of entire economies. Hill says: “I want to build a blockchain that could support a nation-state putting its national currency and phasing out paper dollars.”

Or, as A16Z’s Balaji Srinivasan describes a different-but-similarly-ambitious notion:

Two: because, as Hill said to me,

Never mind “don’t be evil”; we want to build a company that actually can’t be evil.

…by which he means, an organization which is limited by contractual obligations built into and enforced by its blockchain(s).

The distributed nature of Bitcoin has caused people to speculate about autonomous corporations powered by blockchains, which sounds like a creepy Kafka-meets-Gibson notion if I ever heard one. On the other hand, a company which committed to behaving in a particular way, not with a mere promise, but with an enforceable and cryptographically ironclad contract, might be much worthier of the public’s trust than your standard amoral corporation.

This is, of course, all highly speculative verging on cloud-cuckoo-land until people actually start shipping code which turns these notions into reality. What interests me most about sidechains is that, if implemented, they might bring that day closer, by aiding and accelerating the entire ecosystem of blockchain innovation. And I’m awfully curious about what Hill and Back still have up their sleeve (no, they didn’t tell me.) Interesting times indeed.

Image credit: Wikimedia.