Bitcoin and Cryptocurrency Technologies

Sidechains. The sidechains vision is that of numerous flourishing altcoins that rapidly innovate and
experiment, using Bitcoin as a sort of reserve currency. As of 2015 it is only a proposal, but one that is
being actively worked on and has serious traction in the Bitcoin community. The proposal is still in
flux, and we’ll take the liberty to simplify some details for pedagogical purposes.
The obvious but impractical way to extend Bitcoin to allow converting coins from a sidechain back to
bitcoins is this: encode all of the sidechain’s rules into Bitcoin, including validating all of the
sidechain’s transactions and checking the sidechain’s proof‐of‐work. The reason this is impractical is
that the resulting extensions to Bitcoin’s script would be too complex, and the verification effort
needed for Bitcoin nodes would be prohibitive. Besides, the complexity and effort would grow with
the number of pegged sidechains.
The SPV trick.​The trick to avoiding this complexity is to use “SPV proofs.” Recall from Chapter 3 that
Simplified Payment Verification is used by lightweight clients such as mobile apps for Bitcoin. SPV
nodes don’t validate transactions they’re not interested in; they merely verify block headers. Instead
of worrying about the longest ​valid​branch, SPV clients merely look for evidence that the transaction
they care about is in the longest branch, valid or not, and that it has received some number of
confirmations. They assume that the miners who created these blocks wouldn’t have put in the effort
to mine them without validating the transactions in those blocks.
Perhaps, then, we could extend Bitcoin’s script with an instruction to verify a proof that a particular
transaction (say, one that destroyed a coin) happened in the sidechain. The Bitcoin nodes doing this
verification would still be fully validating as far as Bitcoin’s block chain is concerned, but they would
do relatively lightweight SPV verification of events in the sidechain.
Contesting a transfer.​This is better, but still not ideal. To do even simplified verification, Bitcoin
nodes would still have to connect to the sidechain’s peer‐to‐peer network (for each pegged
sidechain!) and track all of the sidechain block headers so that they can determine the longest
sidechain branch. What we want instead is this: when a transaction tries to convert a coin in a
sidechain back into a bitcoin, it contains all the information that Bitcoin nodes need in order to verify
its legitimacy, that is, to verify that a particular sidechain transaction happened. This is the notion of
an “SPV proof.”
Here we present one way in which it could work, with the caveat that this component of Sidechains is
still an area of research. To reference a sidechain transaction in Bitcoin, the user must provide proof
of (1) inclusion of the sidechain transaction in a sidechain block and (2) sidechain block headers
showing that this block has received a certain number of confirmations which cumulatively represent
a certain amount of proof of work. Bitcoin nodes will verify these claims, but will make no attempt to
verify that the chain of block headers presented is the longest. Instead, they will wait for a certain
defined period, say a day or two, to allow other users to present evidence that the block headers
presented in step 2 above are ​not​on the longest branch. If such evidence is presented within the
defined period, the acceptance of the sidechain transaction in Bitcoin will be invalidated.
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