Bitcoin and Cryptocurrency Technologies

long, Alice might be able to go home with both deposits. But this is not a problem: we are happy as
long as there is no way for a player deviating from the protocol to cheat the other player.
Finally, blocks in Bitcoin or any altcoin don’t arrive in fixed time steps, which introduces some
messiness, particularly as the two chains may not be synchronized. Let’s say both block chains have an
average time of 10 minutes between blocks. Then we’d want to pick a “time unit” of say 1 hour. In
other words, we’d want to have ​T​ 1​
be at least ​current_altcoin_block+12​and ​T​ 2​
be at least
current_bitcoin_block+6​, possibly with a greater safety margin.
Unfortunately, there’s a small but nonzero chance that the next 12 altcoin block blocks will be found
before the next 6 Bitcoin blocks. In this case Alice might be able to claim both deposits. This
probability can be made arbitrarily small by increasing the time unit, but at the expense of speed.
This is a neat protocol, but as of 2015 no one uses it. Instead, cryptocurrencies are traded on
traditional, centralized exchanges. There are many reasons for this. The first is the complexity,
inconvenience, and slowness of the protocol. Second, while the protocol prevents theft, it cannot
prevent a denial of service. Someone might advertise offers at amazing exchange rates, only to quit
after step 1 or step 2, wasting everyone else’s time. To mitigate this and to aggregate and match
people’s offers, you probably need a centralized exchange anyway ‐‐ albeit one you don’t need to
trust not to steal your coins ‐‐ further diminishing the usefulness of the protocol.
10.6 Bitcoin‐Backed Altcoins, “Side Chains”
Earlier in this chapter we talked about two ways in which we can allocate units of a new altcoin to
existing owners of bitcoins: either requiring provably burning bitcoins to acquire altcoins, or simply
allocating altcoins to existing holders of bitcoins based on bitcoin addresses that own unspent
transaction outputs. As we saw, neither of these allows bilaterally pegging the price of the altcoin to
that of Bitcoin. Without such pegging, the price of an altcoin is likely to be volatile during its
bootstrapping phase. The motivation for sidechains is the view that this price volatility is problematic:
it is a distraction and makes it difficult for altcoins to compete on their technical merits.
Here’s what we need in terms of technical features to be able to actually peg the altcoin’s price to
Bitcoin’s at a fixed exchange rate. First, you should be able to put a bitcoin that you own into some
sort of escrow and mint one altcoin (or a fixed quantity of altcoins). You should be able to spend this
altcoin normally on the altcoin block chain. Finally, you should be able to burn an altcoin that you own
and redeem a previously escrowed bitcoin. This is similar to Zerocoin, where we escrow basecoins to
create zerocoins, but the difference is that here we need to do it across two different block chains.
The bad news is that as far as we know, there is no way to achieve this without modifying Bitcoin,
because Bitcoin transactions can’t be dependent on events happening in another block chain. Bitcoin
script simply isn’t powerful enough to verify an entire separate block chain. The good news is that it
can be enabled with a relatively practical soft‐fork modification to Bitcoin, and that’s the idea behind
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