Blockstream Makes its Case for Bitcoin-Powered Private Blockchains

Private and public blockchains, normally siloed both technologically and culturally, could become more intertwined if a new effort by bitcoin startup Blockstream gets off the ground.

The venture-backed firm is best known for iterating on top of the open-source bitcoin protocol with projects such as the Lightning Network and sidechains, the latter of which aims to allow users to send assets back and forth between blockchains 'pegged' to bitcoin.

At the same time, the startup has been working on more enterprise-oriented projects, perhaps biting into the recent buzz and experimentation with private blockchains that typically have a few known participants managing the system.

The latest announcement finds Blockstream expanding on the next steps for a project called Liquid, unveiled in late 2015.

A sidechain that many bitcoin exchanges have been integrating for faster money transfers, the project has been slow to see wider release – at least compared to the initial rosy projections of a Q1 2016 offering.

But though Liquid is still not yet production-ready, on Wednesday Blockstream released its second white paper, opening up the details of Liquid's model to the public and, possibly, signifying a step towards permissioned sidechains seeing wider use.

Once the code is open sourced, companies will have the means to spin up their own versions of the technology.

Of note is one of the more interesting claims in the paper, one that alleges the approach provides a better alternative to other private blockchains, at least for some use cases.

Blockstream's Alexandre Bergeron told CoinDesk:

"One of the benefits is that the consensus model is pretty straightforward if you compare it to other offerings in the space. It doesn't take much time to understand."

He added that other consensus models in the space are "complex" and "not well-studied," making it "difficult to predict how they might react to 'adversarial conditions'".

Other differences

The project's backers say its so-called 'strong federations' could allow financial institutions to pin certain types of private sidechains to the bitcoin blockchain, in part to take advantage of the network’s security and the control that it gives to users.

In conversation with CoinDesk, Bergeron emphasized that this gives participants another option if the federation goes awry.

"If they don’t feel like participating anymore, users can return to the main chain and be done with it," Bergeron said.

Andrew Poelstra, a mathematician for Blockstream, said that the paper constitutes "a pile of improvements" over other systems given the company's experimentation with new bitcoin features such as SegWit and confidential transactions, which shield transaction information, on testing sidechains.

A sidechain using confidential transactions would also potentially be more private than the main bitcoin blockchain, as it stands today.

"They provide commercial privacy with support for transactions where asset types and amounts are opaque while preserving the public verifiability inherent to bitcoin," the announcement blog post reads.

That said, Poelstra stressed that a strong federation needs certain conditions to work properly.

The system requires a "small, well-defined" set of participants in order to make the guarantees that sidechains do. He described this state as "Byzantine robust".

"As long as the majority of the participants are acting correctly and adhering to the protocol, then we can prove that the system will continue to move forward and the trades will execute," he said.

But, rather than having the bitcoin blockchain secure the network, a group of signers is responsible for validating the transaction history, similar to other private blockchain structures. (The paper further explains how participants are incentivized to do "the right thing").

As far as how such an arrangement would impact bitcoin, Poelstra explained that the main network remains safe even if such a federation implodes.

"If there’s anything wrong with bitcoin that would affect the sidechain, but the other direction doesn't apply," he said.

Strong federation use cases

So, where might this system be useful?

Bergeron argued that it could provide a more efficient mechanism for prime brokerage, which normally requires a third party to help quickly move, say, $1m.

"What Liquid does is it replicates this model, but it removes the custodianship aspect. Participants can commit their funds to the system without requiring a third party to hold and operate the movement of funds between each other," he explained.

He continued:

"To me that’s one very clear example of the efficiencies that strong federations bring to the table."

On the other hand, Poelstra described it in much broader terms, framing the concept as potentially useful for "any system where there's a small, fixed set of participants who want to work together contractually, but don't fully trust each other".

He stressed that it offers other properties, again pointing out the privacy guarantees and the way in which participants can ensure others are playing by the rules, so to speak, while at the same time hiding information (perhaps financial) they wish to keep private.

The 'other' sidechains

Though this might seem like a novel direction for sidechains, onlookers might be more excited about Blockstream’s "other" idea for the technology: to allow the means to move tokens between public blockchains with different rule sets without having to trust an intermediary.

This was one idea described in the company's first white paper two years ago. But, they might have a ways to go, as not all bitcoin developers are convinced that current sidechain implementations will uphold the security of the main bitcoin network.

Although bitcoin developer Chris Stewart argued on social media that trustless sidechains are actually ready to be deployed (the code has been put through its paces on a test Elements sidechain), he asserts that bitcoin’s current political climate has perhaps stopped it from being implemented.

Whatever the case, the strong federation system seems to be making some headway.

It's not yet production-ready, according to Poelstra, but when it is, the next step is to open source it "so that anyone will be able to take that code and use it".

In this light, he said, the team is releasing the paper in a bid to get feedback from academics and developers as the company looks to chart a strong course forward.

Upside down image via Shutterstock