Big blocks, small blocks, side-blocks, off-blocks...

Big blocks, small blocks, side-blocks, off-blocks...

21 Crypto 2.0 Gateways Liquid Payment Channels Ripple SegWit Sidechains Spam Wallets

In the recent week Bitcoin has experienced another "stress test" in form of a lot of transaction spam (see below for a chart of the amount of transactions in mempool), although this time the spam was not scheduled and it's not clear who was responsible for it. Along with the continuous debate on whether or not to increase the Bitcoin block size, a lot of people have started looking at what are the potential outcomes of the situation. I have covered a similar topic over a year ago, but it might be a good opportunity to revisit the topic and bring everyone up to speed.

A mockup of "Bitcoin surge pricing", inspired by Uber.

The problem

As some of you know, the Bitcoin blockchain was initially designed to have a limit of 1MB per block. This was done due to prevent the bloat and abuse of the network. However, if this limit is strictly enforced, the Bitcoin network would only be able to support a small number of transactions, about 7 transactions per second (compared to Visa's 2000 tps). Clearly, this won't be enough for a payment network that is supposed to replace the banks and credit cards. Either we will increase this size in some way, or we will see Bitcoin become a much different network.

The outcomes

Depending on whether the block size is increased or not and by how much would dictate how the Bitcoin network is shaped. Lets look over some possibilities.

Block size remains rigid

In this approach, the 1MB block size is rigid and remains unchanged. When we start hitting this limit, the miners will be able to pick and choose which transactions to include in the block. Rational miners will pick the transactions that pay them the most in fees (proportionally to their size), thus there will be a bidding war to get into the next block.

Due to the increased cost, fewer people will opt to send transactions themselves, either leaving Bitcoin entirely, or by performing some off-chain settlement. Wallet services such as Coinbase could become more like banks - offering their customers settlement with other people on their platform and other platforms that accept off-chain settlement.

In this scenario, Bitcoin becomes a settlement method for large bank-like wallets and large corporations.

Block size limit is abolished

A polar opposite of the previous approach. The block size limit is completely abolished and miners can create arbitrarily big blocks. While anyone can create a transaction for cheap, the network would soon be attacked by malicious entities trying to push the limit. Someone could decide to generate a 1GB block for example and cause the network to grind to a halt while synchronizing.

Quite quickly running a full node becomes a luxury or a business. We see more reliance on Stratum-like supernodes. The functionality of the network is dictated by them.

In this scenario, the Bitcoin network turns into something like the modern Internet - only big players can access it directly and everyone else has to rely on something like Bitcoin-Internet Service Providers.

Middle of the road

The most likely scenario would be somewhere in the middle of the road - raising the block limit, but doing so gradually. Dedicated users could run their own nodes, but most of us would rely on third parties for helping our wallets function.

Alternative solutions

Bitcoin is both an independent currency and a settlement network for that currency. Whether the block size increases or not, there are a lot of ways one could try enhancing the settlement aspect of Bitcoin.

Soft forks

There are some proposals on how to improve the scalability without hard forking the network. Some of them include softforks such as Segregated Witness , or Sidechains (allowing value to be moved in and out of the Bitcoin network without a trusted third party).

Segregated Witness, or "SegWit" is a solution focused on slimming down the transactions by moving the signatures off-blockchain. This can slim them down to about a quarter of the size, essentially allowing the Bitcoin network to process 4MB of transactions in 1MB blocks. The idea appears to have a lot of support, but since it's mostly streamlining what Bitcoin can currently do rather than creating a whole new solution, there isn't much left to explain without going into technical details.All in all, SegWit can buy Bitcoin some breathing room with its current block limit.

Sidechains is an idea focused on on being able to move the value in and out of the Bitcoin network without depositing the coins with a third party. While this doesn't sound like much, sidechains can lead to a lot more than just scaling Bitcoin - they have a potential of recreating networks with the features of Ethereum or Ripple without having to bootstrap those networks with new coins. These sidechains could be used to settle BTC transactions outside of the network while still not having to worry about the counterparty risk.

Payment channels

Payment channels in general or Lightning Network specifically are an interesting approach to allowing a large amount of transactions to take place outside of the Bitcoin network while everything would still be settled on-chain. The idea was discussed as early as 2011, and today we have some companies that even start advertising it on their websites:

21.co advertising their payment channels right above telling everyone how many blocks it might take to confirm various transactions during the recent spam attack

A payment channel is a way for two nodes to pass payments back and forth between one another using unbroadcasted Bitcoin transactions. Each payment adjust the balances between the nodes - shifting the balance back and forth accordingly. Only the final transaction gets published to the whole world, thus potentially saving a lot of space in a block. While the use case for this solution might be limited (who sends another person multiple transactions over a short period of time?), it gets more interesting when you add the network effect to it.

A simulation of 6 networked payment channel nodes

Now, when you introduce a few "supernodes", possibly in form of Bitcoin exchanges and big companies, you start mimicking the Gateway model of Ripple:

An illustration of the Gateway model of Ripple

Instead of settling directly on the network, anyone can potentially save a bit of fees by connecting to one of the supernodes and establishing a payment channel with them. This would allow you to transact with anyone in the network fast and cheap, while still being able to settle your balance on the Bitcoin blockchain as needed. If the payment channels are open for a long period of time, a lot of people could begin to operate solely within the network. This might be especially important for cross-exchange settlement, or for shared ewallets like Coinbase or 21.co.

Alternative networks

Last but by no means least, we have the alternative networks. A lot of them stand to benefit when the Bitcoin network falters.

Simplest ones would be the altcoins - Litecoin and the like. They reason that if Bitcoin blocks are full, people will join other networks and use other coins instead. I'd take that with a grain of salt, after all, Bitcoin is a better currency in terms of price and market cap than its alternatives, but the other networks might have a higher throughput.

How /r/dogecoin sees the situation

A much more compelling alternative would the the Crypto 2.0 networks and permissioned blockchains - Ripple, Open Transactions, Liquid. Those networks can use the above mentioned Gateway model and move the settlement completely off the Bitcoin network. The only transactions that would need to be included in the blockchain would be deposits and withdrawals. While certainly more rigid and centralized than the payment channels, there are ways of preventing the gateways from stealing one's coins (such as Voting Pools). Moreover, such networks could also be used to issue fiat-denominated IOUs, which might be very attractive for some applications.

Conclusions

The Bitcoin block size debate is still going on, while the blockchain limit is being hit more and more often. Either the Bitcoin network will scale to larger blocks, or higher fees. There are many solutions out there focused on providing alternative means of settling with BTC without having to further burden the Bitcoin network. Only time will tell how our current problems will be addressed and which solutions will be used.

Sample bankchain feature set

Sample bankchain feature set

Bankchains Banks BitShares Blockchain Crypto 2.0 Liquid Permissioned Blockchain Ripple Sidechains smart contracts Smart Oracles Voting Pools

In the recent months, many banks and other financial institutions started looking into the blockchain technology as a potential improvement on their current architecture. Below is a sample feature set of the cryptocurrency technologies that can be used to reimplement and possibly improve upon the banking system as it is today.

Transactions

In all cryptocurrency systems, transactions are the most basic building block of the value transfer network. They have a few important features, including:

• Atomic nature - a transaction can either succeed fully, or fail completely. There is no middle-ground that wasn’t specified beforehand (for example, Ripple’s partial payment flag). It is even possible to have complex transactions that hop across multiple currencies that are still atomic. 
• Self-contained - a transaction in most cases provides all the information that is needed to verify whether it is valid or not. It specifies exactly which money it is spending, quite often how much money is left, as well as contains a digital signature authorizing the move of funds. 
• Undisputable ordering - once transactions are included in a block, their ordering is undisputable. This allows everyone to be able to verify exactly what state the system was before and after the transaction was applied. There is no data discrepancy between the participating institutions as to what happened without the need to resort to a centralized authority. 
• Cryptographic authorization - in the crypto world, there is never a doubt whether someone is authorized to spend the money. Either they own the private keys and can authorize the payments, or they don’t. Moreover, each signature is only valid for a given transaction, so a few authorization problems are mitigated (replay attack, man-in-the-middle, etc.). 
• Easy multi-party escrow - also known as multisig. This allows money to be held by multiple parties in such a way so as to only be spendable when a minimum threshold of parties agrees to spend them. 

Currencies

In the cryptocurrency space, there are essentially three types of currencies.

The most prevalent is a native crypto currency or a digital token. Those are currencies issued by decentralized autonomous organizations, either in the form of complete crypto-networks (like Bitcoin, Litecoin, etc.), or autonomous smart contracts. Those tokens are usually perfectly, mathematically scarce, have a predictable minting schedule and a clear set of rules on how to transact in them. However, due to their decentralized nature, they don’t represent real-world assets very well.

The second kind are derivative currencies (such as BitUSD), which are still created and maintained in a decentralized fashion (without a central or collective counterparty), but through known financial contracts (futures, contracts for difference) can track the value of real-world assets and currencies. Their counterparty risk takes the form of the financial derivative market.

The third kind are IOUs, digital currencies issued by centralized or collective parties usually backed by real-world assets and currencies (such as SnapSwap.USD, BitStamp.BTC, etc). While they are subject to counterparty risk, they have an advantage over the derivative currencies by most often being easily redeemable in kind from the issuer.

Different cryptographic systems have different requirements when it comes to those currencies. A decentralized network will have to have at least the native digital token to avoid spam attacks at the very least. Having that currency, they can also incorporate the remaining two as needed (see BitShares and Ripple for an example). Permissioned blockchains don’t need a native digital token, as the network participants are known entities and can be made liable in case they intentionally disrupt the network. As such, it makes a lot more sense for those networks to mainly feature digital IOUs.

IOU issuers

IOUs in a cryptocurrency network can be a powerful tool. They are useful for not only tracking the value of real-world assets, but also for tracking the trust associated with the currency issuer. If 1 USD from Bank A trades for 1.02 USD from Bank B, we can infer that A is more trusted than B.

When talking about IOUs, there are generally two models that can arise in a system - a web-of-trust or a gateway model (with the real-world examples usually being a mix of the two). In the first model all parties trust one or more parties in the web and money flow is rippling through the system between parties (this is a basis for old version of Ripple). In the gateway model, we have a few central authorities everyone relies on to securely issue and redeem the IOUs everyone else uses (this is a basis for the new version of Ripple). The latter approach might be more useful when there are different classes of peers on the network (governments vs big banks vs small banks vs credit unions, etc.), but the former is useful compliment for smaller-value settlement between the same classes of peers.

IOUs inherently track debt between parties (if you have 1USD IOU from me, it means I owe you 1 USD). In systems like Ripple it is also paired with another variable - trust. Trust limits the amount of IOUs / debt one is willing to take from another individual. This can be especially useful if say, two banks established a mutual trust between one another to simplify payments or reduce their costs. They might agree for example to extend $1M line of credit between one another and use that channel for settlement for any payments made between their accounts. If the credit limit is ever reached, they can still settle with potentially more expensive IOUs from a gateway (say, a government), or settle the debt in some other way and resume operating with the cheaper IOUs.

Decentralized exchange

Having a number of currencies issued on a decentralized network opens up a lot of possibilities. Most useful one perhaps being a decentralized exchange allowing trading between any currency pair. With an open market accessible to all peers, one could expect to drive the spread for performing FX trades to spot, even for small value transactions. Having that, one could expect to start seeing the Singularity of Money going into effect, where the currency you own would not matter as much as the value of that currency. Multi-currency hops would allow one to route money through the most efficient market in the web of value allowing for easy bootstrapping of new remittance platforms and applications.

KYC

An important aspect to consider while designing a crypto network is how it can comply with KYC regulations. While decentralized networks such as Bitcoin are focused on fostering strong pseudonimity, permissioned blockchain users in most cases would be interested in dealing only with known parties. This can be achieved by either having all entities in the system known and explicitly recognized, or having a more open system but with each peer being responsible for doing their own KYC.

The first is a model that seems the most popular with private permissioned blockchains such as MultiChain, where the creators of the system explicitly have to grant read and write permissions to every network participant (thus giving them an opportunity and potentially a responsibility to perform the KYC on everyone).

The latter model is more popular on public blockchains that allow permissioned access, such as Ripple. There, every gateway can explicitly either blacklist addresses to prevent them from using the IOUs they created, or create a whitelist of only the addresses that can send and receive the IOUs.

Block encapsulation

One of the more important differences between a database-based approach and a blockchain-based approach for processing transaction is the idea of encapsulating transactions in blocks. A blockchain, whether it is permissioned or public, has a few key advantages:

• Order of transactions is strict - there is no doubt which transaction is to be applied first and at what time. This addresses the problem of race conditions and can be used to address the problem of frontrunning in a system without a central authority. 
• History is immutable - since all blocks in a blockchain refer to a previous block’s hash, it is impossible to alter any record of what blocks and transactions took place in the past without rewriting it entirely. Paired with real-time anchoring of block hashes into a public immutable ledger such as Bitcoin ensures that any block forks would be evident and would have to be accounted for. 
• Provable auditability - knowing only the latest block hash (which is a small digest in comparison to the actual size of the blockchain), one can not only audit the entire history of the blockchain, but the auditee can probably for the first time in history provide a positive proof that they disclosed all the data for the audit. Any records that are missing or have been altered will come up in a proper audit. 
• Everyone can be sure they have all the data - if one is at the blockchain head, they know they have or can fetch all historical data. There is no doubt whether some chunk of data is missing or not. 

That being said, blockchains are not a silver bullet. They come with their own weaknesses:

• Blocks are slower than individual transactions - while a transaction can be committed to a database within a few read/write cycles, a block takes awhile to be created and propagated. The fastest blockchains out there achieve about a block per 1-5 seconds. While each block can contain many transactions to possibly reach the required throughput, those transactions can only come in discrete quantas, not a constant stream (as they say, “Never underestimate the bandwidth of a station wagon full of tapes hurtling down the highway.”). 
• Performance-wise, a blockchain will probably have a higher transaction overhead than an optimized database. There are a few possible reasons for this - the fact that in the end transactions from a block will have to be committed to a database anyway, the overhead of synchronizing the network and resolving forks, or the relative age of Bitcoin technology (7 years) vs say, SQL (about 40 years). 
• Currently, there are many blockchain-based cryptocurrency solutions out there, but there are also cryptocurrency networks out there that don’t rely on blockchains, such as Open Transactions. The latter relies on having a few notaries verifying transactions in real time and providing cryptographic receipts for those transactions. It is an interesting approach that allows anyone to prove their balance by merely presenting the last receipt without having to hold onto any prior history.

Tiered blockchains and bandwidth reduction

As it became evident in the Bitcoin world, blockchains can become vulnerable with increased network activity. As such, a modern blockchain solution for high-transaction-volume environment should be prepared to address the bandwidth issue before it might become a problem.

There are a few possible approaches one can take - settle transactions off-blockchain (like the Lightning Network), create a separate permissioned blockchain (like Liquid), or create sidechains (like Credits or what Blocksteam initially wanted to create). Out of those three, sidechains appear to be the more ideal solution - allowing one to move value on and off the main blockchain, transact on that blockchain with the transactions being cryptographically linkable to the main chain (through anchors), and not rely on more centralized third parties.

As such, it might be feasible to construct a tiered blockchain that would be able to offload a good amount of transaction volume off the main chain while still allowing settlement between tiers. At the top of the chain we would perhaps have a public blockchain where the highest-tier peers would issue their IOUs - governments, biggest banks, etc. Below that, we would have sidechains maintained by various banks and other financial institutions. This would allow them to perform more internal transaction without cluttering up the main chain. If needed, more sub-sidechains could also be introduced to further increase transaction throughput. One could also perform sidechain-to-sidechain transactions through a dedicated protocol (such as what Interledger is proposing).

It would be useful for the top of the chain to be a public blockchain as it would allow more institutions and possibly even governments to join and integrate directly with it.

Sample network graph of a tiered blockchain:

Proof of Solvency

One very interesting concept that emerged from the Bitcoin world is so called “proof of solvency”. It allows institutions such as exchanges or gateways create a positive proof that they own a certain amount of currency and that their liabilities are no greater than their currency reserves. Depending on the system in question, the proofs can be either be complete (proving beyond a shadow of a doubt both the assets and the liabilities) or disprovable (one can present undeniable evidence that the institution is lying).

The first scenario is mainly applicable for completely open ledgers - in most cases, only cryptocurrencies and Crypto 2.0s. For example, BTC2Ripple can prove both that they own a certain amount of bitcoins AND the level of their outstanding liabilities on the Ripple network. Since both networks are open, the transaction can be verified to be true or false at any given time.

The second scenario applies whenever we’re dealing with either closed networks, or networks that don’t provide cryptographically signed proofs. This includes exchange’s private databases and bank statements (barring something like TLSNotary). In this case, we either have to rely on some signed documents or PDFs supplied by the banks about the account balances, or generate a merkle tree of all account balances on an exchange. An exchange cannot prove that the information is complete, but anyone can prove the data is invalid if they find their account balance either omitted or altered.

As such, Proof of Solvency can be an important tool for financial audits, allowing them to be performed at any time without disrupting the normal business operations. Some institutions might even opt for continuous proof - updating the required information in real time to bolster confidence in their business.

Proof of Solvency might be fairly straightforward in the above proposed tiered blockchain. Any balance in a sidechain should equal to the amount of assets held at the higher-level chain. The top-level chain would have clear balances of who has how many assets and liabilities.

Voting Pools and auditing competitors

Voting Pools are an interesting idea for keeping everyone honest. In this approach, we have multiple parties vouching for one another’s solvability and being liable for bailouts in case one of the parties goes under. For example, we could have multiple exchanges forming a voting pool and keeping their bitcoins in multisig addresses such that even if one of them turned rogue, they couldn’t defraud their customers nor turn insolvent. This is made possible with continuous proof of solvency, as explained above.

Voting Pools could also be useful for having multiple institutions creating IOUs backed by all of them. These could include:

• The Euro currency, issued by the joint agreement between multiple EU countries 
• International Special Drawing Rights issued by the International Monetary Fund 
• Fiat IOUs backed by multiple banks 

While Voting Pools are the most efficient in a network based on native cryptocurrencies such as Bitcoin, the concept might also be used in permissioned blockchains.

Smart contracts

The final catch-all solution for everything one couldn’t predict while designing the system. Smart contracts are flexible programs that live on the blockchain and can execute commands based on the state of the network. Coupled with smart oracles, the contracts allow for creation of such projects like a decentralized prediction market.

Conclusions

There are many practical applications of the blockchain technology for banks and other financial institutions. Failing to embrace the new technology might make the old network obsolete. The above are only some of the examples of what can be achieved and it is very likely we will see a lot more innovation in the following years. Even from those building blocks we can construct innovative technologies (such as self-regulating universal basic income).

Sidechains for bankchains

Sidechains for bankchains

Blockchain Crypto 2.0 Permissioned Blockchain Sidechains

After talking about sidechains as an important feature for reimplementing the cyrptocurrency landscape and criticising Liquid for not living up to its full potential, I had some idea about a new area where sidechains could play an important role - in the permissioned ledger landscape for the banking industry.

A quick recap

While there is some debate as to what are the essential properties of sidechains, I usually go by the definition of "a sidechain is a blockchain with a distributed two-way pegged currency from other blockchains". Generally, something like Credits or BitBasket is aiming to do, but not what Liquid is currently offering.

Sidechains are useful as they:

• Move some transaction volume off the main blockchain
• Allow extra functionality on the sidechain not available on the main network
• Allow the transfer of value back onto the main chain without the use of centralized or decentralized third parties

A permissioned ledger is a centralized or decentralized (but not distributed) blockchain ran by one or more parties where the access to the network or various functions on it is gated to only the approved parties. Here an some overview of how the technology compares to traditional, distributed databases.

A permissioned sidechain

If we relax the definition of a sidechain to include any currency (crypto-native, IOU, etc.) on any network (centralized, decentralized, distributed), we can create an interesting sidechain-bankchain combination that would be useful for an international settlement system.

The reason why we'd like to utilize a model like this would be to allow nations and big international organizations to:

• Settle between one another on a global network
• Have autonomy over their national / corporation networks
• Allow for private settlement networks to operate, while still allowing for proof of solvency audits on the main network
• Compartmentalize regional transactions from trans-regional tranasctions for speed and network throughput while still allowing for easy interoperability and global settlement

Tiered sidechain

If the above system was put into place, we probably would see a lot of companies big and small want to get onto the network. If the system would be anything like the current banking system, it would be unlikely that everyone would have the capital or meet other arbitrary requirements to connect directly to the main chain. However, there is nothing stopping us from designing the system with that in mind and perhaps having side-side chains - the biggest companies would connect directly to the main chain, while the smaller companies could connect to them and so on. This way we could have everyone on the same network while separating the peers on the network based on their size and needs (for better or for worse).

Lastly, we could add inter-chain settlement protocols like something Interledger is proposing. This would allow for direct connections between various sidechains without the need of going directly to the top level chain to increase throughput and decrease cost.

Tying it together - how would it work?

Now that we have some overview of how the network might be structured, lets explore a few ways it could work.

The top, global chain would be best served as either a multi-party permissioned ledger (like Eris or Multichain), or a distributed network (like Ethereum or Ripple). This way more participants are likely to join without seeing this as "the USA network" or "the Eurozone network" if it was a more centralized solution developed and controlled by one nation or company.

Ideally, the top chain would be where the various governments and big entities would track their debt / IOUs. This would give a clear insight into who owes who how much and allow lower-tiered chains to use that as base monetary system.

Lower-tiered chains would probably be either permissioned or completely centralized blockchains or other cryptograhy-based networks (like Open Transactions). They would be linked with the main chain through a two-way peg. This would allow for easy settlement between the sidechain and the main chain without completely relying on the chain custodian to forward all of the transactions back and forth by themselves.

The sidechains could also follow some safety mechanisms of the voting pools - being constantly audited for solvency and allowing anyone with a balance on the sidechain to redeem their underlying balance on the main chain according to the protocol.

If you wanted to connect to the network, you could do so by connecting to any of the existing peers on the network - usually some bank or corporation. After that one integration, it would be possible to send money to anyone else on the network easily (and hopefully cheaply).

Is this a good idea?

At the moment, I'm not sure how much of this idea would be useful when implemented in the real world. It seems that a lot of banks and institutions are interested in the blockchain technology, the concept of sidechains is a good way of segmenting the network transactions. Moreover, the entire idea seems similar enough to the way things work nowadays that it might be attractive to the companies from "the old world". That being said, I'm not sure if there are some hidden complexities in the proposed solution that would impair it in some way - a lot of the technologies mentioned are either still in development or are still in the conception phase. So for now I would categorize this as "an idea worth considering" and see where things might go from here.

Related links:

• The Singularity of Money

Liquid - when sidechains say "fuck it"

Liquid - when sidechains say "fuck it"

analysis Liquid Sidechains

We had big news in the Bitcoin world - Blockstream, the company that has been working on sidechains for awhile has announced they will be launching their first sidechain called Liquid. The announcement is all over CoinDesk, BitcoinMagazine, IHB and others. Unfortunately, when you look closer, what is being proposed is not really fulfilling the promise of sidechains...

What is Liquid?

Liquid is a settlement system for Bitcoin exchanges. It allows one to "[reduce] the time in which bitcoin-denominated funds can be transferred between accounts at these institutions" [1] and "allowing partner exchanges to move funds between order books without the need to transfer funds on the bitcoin blockchain" [1] for "an undisclosed monthly subscription fee" [1]. This will be accomplished by "[finding] partner exchanges transferring funds to a shared multi-signature wallet address, with a Byzantine round robin consensus protocol used to process transactions"[1]. The network will be run by known exchanges, essentially boiling down to a permissioned blockchain. The block signers will be running on proprietary hardware to prevent "tampering with the block signers when they are up and running [, further minimizing trust].".

What are sidechains?

Even more so than "blockchain", "sidechain" is a bit of a nebulous term. Blockstream, who are pretty much the main developers in this space have defined the term in their whitepaper as

"A sidechain is a blockchain that validates data from other blockchains"

This opens it up to interpretation as to what is and isn't a blockchain. Is Bitcoin a sidechain since it contains Factom blockchain data? Is Counterparty a sidechain since you can trade BTC on it? Is Ripple a sidechain since we have services like BitStamp and SnapSwap being Bitcoin gateways onto the system?

I personally expand the term to "a blockchain with a distributed two-way pegged currency from other blockchains" (a quick refresher on centralized, decentralized and distributed definitions). Generally, it should be a system that is not rely on a handful of centralized gateway / bridges to move value back and forth between the networks, but a more protocol-level way of achieving deposits and withdrawals.

Having a one-way peg is dead easy - we've done proof-of-burn years back. Two-way peg, unfortunately, requires a soft fork in the Bitcoin protocol, or an entirely new system to be built from grounds-up.

Liquid is not innovative

Looking at what has been said about Liquid - it's not an innovative technology. It can be boiled down to:

• Funds are deposited in a multisig address controlled by multiple exchanges [2]
• Transfers between the exchanges happen when multiple exchanges sign off on the transaction in a mechanism similar to green addresses [2]
• Transfers require no confirmations because the network won't sign a double-spend against itself

The technology is nothing new - we've had multisig since 2012, and even frigging MtGox used a green address in 2011.

I'm also not yet sure whether Liquid provides some cryptographic receipts for deposits. If they don't - the network isn't entirely gox-proof. You may have proof-of-liquidity (balance in the multisig address), but you'd be lacking proof-of-liabilities - exchange clients or counterparties being able to prove who is owed how much in case the servers blow up due to incompetent PHP programming. Having a pile of bitcoins and a mob of people is not enough to know who is owed how much.

If Liquid has proof-of-liabilities or some other form of cryptographic receipts, that is great! It means they can be compared to Open Transactions' Voting Pools idea from 2014.

Now, to be fair - you don't need to be innovative to be useful, just be honest about it. What Liquid is, I wouldn't classify as a sidechain, but it can still bring a lot of value to their customers. That being said...

Liquid is not enough

Do I believe being able to speed up BTC transfers between exchanges is a useful thing? Yes. However, do you know what is the biggest pain point in Bitcoin exchanges and arbitrage? The fiat part. I'll be able to save an hour or two on my Bitcoin deposits to lock in a trade at a good exchange on another continent, but then I'll have to wait a few days for my fiat to move around so I can arbitrage in the other direction, great. Well, maybe pairing this with something like Tether would be good enough...

Other points

A few last points that don't fit anywhere before I wrap up:

• Proprietary hardware requirement - if someone told me that to run some system that takes care of my coins I would have to use their proprietary hardware, that's where the conversation would end. I understand, you want the system to be hardened against attacks, but that's exactly why you need heterogeneous network - if everyone has the same hardware and software, you can take down the entire network with the same exploit. Not to mention, proprietary hardware doesn't fit well with "trust but verify" model of Bitcoin.
• Obfuscated balances and trade data - cool feature, as long as it doesn't interfere with proof-of-liabilities

Conclusions

Liquid looks like a very interesting project, but it's not the sidechains we are looking for. I guess it's a fair compromise between not being able to do anything because one needs a soft fork to implement the full vision and launching a whole altcoin just to have sidechains properly implemented. I guess you can only wait so long for things to improve before you say "fuck it" and create something between where we're now and where you're aiming to be in the future.

[1] - http://www.coindesk.com/blockstream-commercial-sidechain-bitcoin-exchanges/
[2] - https://www.reddit.com/r/Bitcoin/comments/3ok8ga/blockstream_announces_liquid_bitcoins_first/cvydu7r

EDIT:

I heard rumours about the proprietary hardware used for Liquid being secured by thermite that would destroy the hardware if it was tampered with. Reportedly, the hardware would have to be picked up in person as well. While I can't find a reference for those statements, if they were true it would make the situation even weirder (perhaps making it quite problematic for companies to get a hold of those outside of the country they would be produced in - try bringing such highly flammable package onto a plane...).

Related discussions:

• https://www.reddit.com/r/Bitcoin/comments/3orjmz/liquid_when_sidechains_say_fuck_it/ 
• https://www.reddit.com/r/Bitcoin/comments/3p6mn2/liquid_created_the_beating_heart_of_a_new_banking/

The dawn of the great crypto extinction and reimplementation

The dawn of the great crypto extinction and reimplementation

Crypto 2.0 Ethereum Ripple Sidechains

In the crypto world, there are hundreds if not more of cryptocurrencies. However, just like we saw an explosion of cryptocurrency projects in the past few years, we might see a "great crypto extinction" event, possibly accompanied with a great reimplementation effort. Let me explain what I mean by that.

The current state of affairs

Currently, we have a lot of different cryptocurrencies cropping up. Those could be roughly divided into a few categories:

• Copycoins - currencies that copy Bitcoin and tweak only a handful of features that don't alter how the coin behaves. Those would include Litecoin, Dogecoin, or Quarkcoin.
• Asset coins - copycoins that issue and distribute real world assets through a copycoin system, for example Coinaaa or PayCoin.
• Innovation coins - currencies that innovate with the Bitcoin technology and take the technology in new directions. Those would include Dash (formerly Darkcoin) or Namecoin.
• Token coins for Crypto 2.0 networks - coins tied to a Crypto 2.0 network and used as a native currency for various purposes. Those would include Ethereum, Ripple or BitShares.

With the development in the crypto space, a good amount of those standalone currency networks are already becoming obsolete. The Crypto 2.0 networks are making the copycoins and the asset coins less and less desirable to use - Namecoin can be reimplemented easily as an Ethereum script and any asset coin can be easily issued on Ripple for example.

However, there are a lot of people opposing the use of those network due to the proprietary tokens needed to run the system. However, if the concept Sidechains delivers on its promises, that issue could be solved in the near future.

Sidechains - an important piece of the puzzle

The premise of Sidechains is to allow anyone to move bitcoins out of the Bitcoin network into a separate network and vice versa. This would mean that we could easily move value between cryptocurrency networks without relying on centralized exchanges, proprietary tokens specific to those networks or multi-party voting pools.

If this goal would be achieved, it would mean that any Crypto 2.0 network could be in theory reimplemented to use bitcoin-pegged tokens as its native currency, tapping into the huge Bitcoin market cap and relatively more stable value. In other words, we could have Bitcoin-powered Ethereum, Ripple, BitShares, etc., and those would in turn make a lot of other coins obsolete in the process.

The great extinction event - who will survive?

In the crypto world, it is sometimes hard to predict which projects will survive and which will die. It seems that a lot of projects are driven by their community (such as Dogecoin), speculation (as outlined very well in The Story of Bob Surplus), or the development team behind it (Ethereum). Moreover, software never dies - if there will be at least one person running a client for CoiledCoin in 50 years, it can't really be called dead.

That being said, there are definitely some networks that will remain largely unaffected even if and when the Sidechains will take off. Those would include the blockchains that take a lot of technical expertise to develop and maintain, such as Ethereum or Ripple. They are unlikely to be dislodged from their position because they have or would have by that time a big development team improving the technology raising the barrier to entry for any newcomers.

The same could be said for more "established" cryptocurrencies, such as Litecoin. Their long history will let them remain pretty much in the same position they are today - as something to trade and speculate on.

Conclusions

With the possible advent of Sidechains, we might see a great cryptocurrency extinction event that will drive to replace obsolete cryptocurrencies with new technology. We are likely to see some more innovative projects, such as the many Crypto 2.0 networks, reimplemented as sidechains to augment what is currently possible on the Bitcoin network.