Blockstream releases improved sidechain white paper to eliminate third-party operation risks (full text download)

Blockstream has released a white paper detailing a system called Strong Federations , which is the basis for its sidechain project Liquid and aims to improve privacy, reduce costs, and speed up the value transfer and settlement process between exchanges and brokers.

Interoperability blockchain solutions

Blockstream, led by Adam Back, has released a white paper titled “Strong Federations: An Interoperable Blockchain Solution to Solve the Risks of Centralized Third Parties” (download the full text on CoinWare). The white paper delves into a system of federated pegs for use in sidechains attached to the Bitcoin network.

While Blockstream already discussed this joint peg system in its first sidechain whitepaper, this new whitepaper updates the concept by allowing all participants to maximize the benefits of the network while receiving certain economic rewards, while ensuring the smooth generation of new blocks and withdrawals in the sidechain.

Blockstream said:

The concept of federated pegs proposed in this white paper complements the initial version of the sidechain white paper. Strong Federations enables asset exclusivity across markets without the need for centralized trust; the system enables transactions to be conducted while maintaining commercial privacy, but the specific asset types and quantities are not public, and also has similar verifiability to the Bitcoin blockchain.

The first sidechain project to deploy strong federation is Liquid. Liquid is a private sidechain project whose inherent security features help speed up the transfer and settlement process between exchanges and brokers.

Sidechain

Sidechains are linked to the Bitcoin network and can provide new assets with different functions and features as secondary blockchains. The most typical example of sidechains is the Rootchain (RSK) platform. When users deploy and use smart contracts on this platform, they do not need to invest in another new cryptocurrency.

The sign of successful deployment of sidechain technology is the complete decentralization of reality. Users can send Bitcoin to a special address to lock it, and then withdraw this secondary asset on the sidechain, and vice versa. This method is called a 2-way peg peg.

Although it is possible to lock coins on the Bitcoin blockchain and then withdraw them on a sidechain (which can be deployed via Proof-of-Burn), the withdrawal process cannot be fully decentralized due to the limitations of the Bitcoin protocol.

In order to fully function, the sidechain operates in both directions, but the withdrawal of secondary assets is still not transferable to the Bitcoin network. Therefore, another semi-decentralized option for bidirectional pegs is created: Federated pegs pegs.

Joint wedging

Joint Wedge entrusts the withdrawal function to a group of reputable and reliable companies, namely exchanges.

The whole process is very simple. In secondary blockchain transactions, the Bitcoin network is not responsible for freezing or unfreezing funds. To transfer assets within and outside the sidechain, users can transfer these funds to a multi-signature (multisig) address controlled by the federation.

Once this address receives a certain amount of bitcoins, the secondary blockchain will distribute this amount of funds in a completely decentralized manner, and the entire process does not require federation review.

If a user wants to transfer coins from the sidechain to the Bitcoin blockchain, he only needs to transfer this part of Bitcoin to a specific address in the sidechain and attach the output value information in the Bitcoin blockchain to the sidechain.

The joint peg then creates a transaction for the output, which must be signed by a majority of key holders, so that even if a member of the joint peg has bad intentions, it will not compromise the security of the entire system.

Blockstream & Liquid

Blockstream’s research into sidechains began with the paper “Innovating Blockchains with Pedestal Sidechains”. This white paper introduced the concept of sidechains to the Bitcoin world. Since then, Blockstream has been committed to the research and development of sidechain technology, aiming to create a system with strong compatibility and functionality.

Blockstream raised $55 million in its Series A round, with the main goal of developing sidechain projects. Since then, the company has achieved a series of achievements, including the creation of the Elements project. As an open source project, developers can build and test their own sidechain products in Elements, such as the root chain, Gem, and Elements Apha. Elements Apha is a fully functional sidechain system connected to the Bitcoin test network, including "production-grade" products such as Segregated Verification (SegWit) and Confidential Transactions.

By deploying a strong federation model, Blockstream hopes to achieve high privacy, low cost, and high efficiency in the value transfer and settlement process. The biggest advantage of exchanges choosing Liquid is commercial privacy.