Blockstream: A Bitcoin Blockchain for Everyone?

This company wants to create an army of different blockchains.

Could Blockstream create blockchains for everyone?

Bitcoin’s blockchain is a kind of general ledger, recording every bitcoin transaction that was ever made. It was supposed to be just for recording financial transactions, but people have been using it to record all kinds of other things. For more about that, read our article here.

Piggybacking on the bitcoin blockchain might be useful for the people sending those messages, but it can clog up the blockchain with entries that aren’t relevant for bitcoin transactions.

A lot of people don’t think that’s very fair.

Anyway, the blockchain wasn’t really designed with all these other messages in mind, so using to send them is a bit like using a fax machine to send someone a photograph – it kind of works, but it could be better.

What people need is another blockchain designed just for their kinds of messages. Maybe it might update its transactions more quickly, or include the ability for specific kinds of information to be added to a transaction.

People could just make their own blockchains to carry their own messages, but the bitcoin blockchain offers a distinct advantage: security. When people use their computers to mine for bitcoins, that computing power helps to secure the transactions in the bitcoin network and stop others tampering with them. Because so many people use their computers to mine on the bitcoin network, that makes it very secure. So people who send messages like to record them in bitcoin transactions.

Sidechains to the Rescue?

One company, called Blockstream, thinks that it has found a way to create blockchains that do specific things, while still taking advantage of bitcoin’s security. Its software creates entire alternative blockchains for other purposes. These chains, which have their own features, are called ‘sidechains’ because they are connected to the bitcoin blockchain, to take advantage of its trustworthiness.

These sidechains ​are connected by ‘pegging’. This enables someone to switch out their bitcoins for tokens used on one of the sidechains so that they can use it there. Then, when they’re finished, they can switch it back.

Co-founder Austin Hill hopes that businesses will create sidechains to manage other assets. “They could represent some kind of asset in digital form, be it a gold certificate, client side funds, or a token used in a virtual world,” he said.

Someone could transfer bitcoins into a gold trading exchange running on a sidechain, for example, where the bitcoins would represent quantities of gold at market prices.

Not only do these sidechains stop people weighing down the bitcoin blockchain by shoehorning their own applications into it, but they can also enable people to make their own blockchains smarter, according to co-founder Adam Back.

“You can move more business logic into the blockchain so that the blockchain is enhancing smart contracts,” he said. A sidechain could be programmed to impose spending limits, say, or to give a third party a cut of every transaction based on predefined rules.

Speedbumps for Blockstream

Blockstream faces some challenges, though. For its system to work seamlessly and effortlessly, it needs to change the underlying program that runs the bitcoin network.

There are only a handful of people authorized to do that, and they haven’t agreed to do it yet – even though Blockstream has been busily employing some of the people that contribute to the development of the bitcoin software.

Instead, it has had to create a workaround, making an agreement with several miners who will mine for bitcoins in a certain way. This enables the pegging to happen and makes sidechains a real possibility.

The company has released tools for software developers who can now create their own bitcoin blockchains. The company also scored $21m in funding – that’s funding using real money, from large Silicon Valley investors, rather than the crowdselling which has become such a feature in the bitcoin universe.

Those funders must have a lot of faith, because as seems usual in the tech space, Blockstream isn’t revealing a profit model yet.

Nevertheless, if this ‘blockchain 2.0’ business can pull it off, this could be the first step in a much larger story for the technology.