‘New Bitcoin’: Sidechain Elements by Blockstream and The Lightning Network

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by Eugenia Romanenko · 5 min read
‘New Bitcoin’: Sidechain Elements by Blockstream and The Lightning Network
Blockstream’s core area of innovation is sidechains, a technology focused on improving on the blockchain, the most powerful public utility for distributed trust systems. Sidechains are blockchains that are interoperable with each other and with Bitcoin, avoiding liquidity shortages, market fluctuations, fragmentation, security breaches and outright fraud associated with alternative crypto-currencies. Photo: Blockstream

The cryptocurrency world is growing really fast offering high-profile and sophisticated projects to the Bitcoin community. Sidechain Elements and Lightning Network are those incredible ideas that are coming true.

About a week ago,Blockstream announced the launch of their long-awaited sidechain protocol dubbed Sidechain Elements:

“Sidechains extend Bitcoin functionality through interoperable blockchain networks and today’s open source release includes an experimental sidechain that has a number of new working capabilities. With the release of Sidechain Elements, Blockstream is moving this effort into the community,” says Adam Back, co-founder and president of Blockstream. “We’re inviting developers to work with us, to test and use the code for their projects, and to share their proposals and code for additional capabilities,” he adds.

Sidechains are decentralized, peer-to-peer networks that provide useful security, risk, and performance enhancements for global systems of value exchange that don’t need intermediaries, central banks or other third parties. They are distributed ledgers that are interoperable with each other and with Bitcoin, leveraging the most secure blockchain and code infrastructure in an additive way. Sidechains enable innovators to safely develop new applications without jeopardizing Bitcoin’s core code and putting billions of dollars worth of digital currency at risk,” explains Mr. Back in the announcement.

According to the WSJ, enhanced transactions confidentiality could be useful for Wall Street-focused businesses such as Digital Asset Holdings, a New York-based startup that’s developing blockchain-based solutions for post-trade securities settlement. Shaul Kfir, DAH Chief Technology Officer, said it could be a “very powerful way to protect investors from having to disclose sensitive business information, even while providing complete transparency to regulators.”

“Computer security is at a pretty abysmal point,” Mr. Kfir adds. “You really want it to so that when any data is moving through the transactional layer it is as secure as possible, as encrypted as possible.” Moreover, Blockstream’s confidentiality element goes “99% of the way” toward achieving those goals, states Shaul Kfir.

Last year Blockstream raised $21 million in a new funding from about 40 investors, such as Reid Hoffman, LinkedIn co-founder and Airbnb board member, Khosla Ventures, Canadian seed fund Real Ventures, Crypto Currency Partners, Mosaic Ventures, Google chairman Eric Schmidt’s Innovation Endeavors, Future\Perfect Ventures,  Ribbit Capital and AME Cloud Ventures.

The Sidechains

Sidechains project has already gained support from a number of bitcoin developers. Among others Adam Back, the creator of the proof-of-work system, called Hashcash, which is used by bitcoin and some anti-spam systems.

In the Sidechains ecosystem, the new currency can be created only after the user deactivates bitcoins, in other words, new tokens can be issued if bitcoin is frozen. This means the new digital currency is backed by bitcoin. The Sidechain user can, for example, deactivate 10 bitcoins and issue 40 altcoins.

Sidechains is a way of creating new currency inside the bitcoin currency network and the project developers believe it could turn bitcoin into a reserve currency. The large number of altcoins, which are traded on exchanges today, can be valuable to the bitcoin sector due to certain features, writes Kyle Torpey at Inside Bitcoins.

However, each altcoin has its own exchange rate and their usefulness as money is kept back by the bitcoin currency network. Thus, instead of having their own exchange rate, the issued litecoins are traded at 0.25 bitcoins. Analysts compare this to the fixed exchange rates that were used between fiat currencies and gold.

Although gold is not yet the reserve currency today, central banks are still holding the metal, although there are no important reasons for keeping it.

In spite of the fact that many fiat currencies have served as a reserve currency until today, dollar remains to be the main reserve currency. For years the US dollar was backed by gold, before President Nixon abolished convertibility of US dollar to gold back in 1971 in order to halt inflation.

About 87% of the world currency reserves are kept in currency and its value totally depends on the government. While having a potential to turn into the main reserve currency of the Internet, it also has chances to become the reserve currency in the real world. However, the decision is up to bankers who define what to keep as a reserve currency.

The Lightning Network

However, there is another piece of news to mention in this context. Recently, an early draft of a radical project has been released under the name of The Bitcoin Lightning Network. The proposal has the potential to move lots of Bitcoin transactions off the blockchain, without sacrificing any verifiability or security.

The Lightning Network would allow the creation of “micropayment channels” across which multiple Bitcoin transactions can be conducted without interacting with the blockchain, except for the initial transaction that initiates the channel. Plus, if any party stops cooperating, the channel will be closed and all its outstanding transactions kicked up to the blockchain to be settled there, reads TechCrunch.

So, this distributed micropayment network, the Lightning Network, could scale Bitcoin transactions up to “billions of transactions per day” with minimal use of the blockchain and minimal fees.

Blockchain News, News
Eugenia Romanenko

Eugenia graduated from Minsk State Linguistic University with a degree in Intercultural Communication, Translation/Interpretation (Italian, English). Currently she works as a business analyst, freelance interpreter and tutor. She’s fond of numismatics, photos, good books and sports, adores travelling and cooking.

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