An acute interest in blockchain-based securities trading led to my modifying a short Python script that would label fractions of a bitcoin as company stock. This was years ago, but I’ve kept watching for developments in this space ever since. I was convinced someone would eventually do it better.

Sidechains have been on my radar for about six months. What you should know about sidechains is it’s being developed by a company called Blockstream, and that it faces real security challenges compared to other approaches. Sidechains is seemingly marketing itself as a panacaea to everything Bitcoin wants to do but can't. However, for me, this has always meant blockchain-based stock trading. I personally doubt Bitcoin needs faster block times or ring signatures for additional privacy. In my opinion, sidechains and Blockstream is mostly a Bitcoin 2.0 startup.

The fact is, you can send BTC to Havelock.com today, which is a shady off-chain Bitcoin stock exhange. Everyone is perfectly capable of depositing BTC at Havelock or a futures exchange. Your money may get stolen, or the site may suddenly close its doors. Problems such as this are what sidechains, and other projects some of which I’ll delve into below, are attempting to solve. That is:

1. There is nascent demand for Bitcoin stock trading, futures, options and derivatives.

2. Off-chain service operators who provide these services today too often steal the money.

3. Off-chain services are forced to operate in the clear to develop trust in the marketplace, under their real identities, which invites regulators to shut them down.

Open Transactions (OT) is competing with sidechains to solve this. Specifically, OT voting pools prevent off-chain service operators from stealing all the money. Since they can’t steal the money, services like Havelock.com could safely operate over Tor, and it wouldn’t matter as much who was behind the website.

With OT, you can use basic web development skills to launch a trustless Bitcoin stock exchange platform without restriction. The only downside is users still ultimately need to trust the web service developers not to be corrupt, which is a sticking point. Society isn’t ready to trust stock and futures exchanges operating over Tor for example, because there would be too much room for games. You could launch clearnet services with OT integration, though, it’s just that you couldn’t do anything innovative without the SEC shutting you down.

Sidechains at its core solves the service operator trust issue, but it has new trust issues of its own doing. The basic idea of sidechains is, instead of creating Havelock.com, you bake Havelock.com into a blockchain, and then you would peg that new blockchain to Bitcoin’s blockchain so that Bitcoiners can use your service without having to buy an altcoin. Compared to OT, it’s quite frankly rocket science, which is a downside. In addition, sidechains don’t share Bitcoin’s security model, so they may actually offer less security than a traditional web service with OT integration.

51% attacking Bitcoin doesn’t allow you to steal BTC. But with sidechains, from what I understand, 51% attacking _does_ allow you to steal BTC. [1]

As much as I want sidechains to work, I’m not convinced Bitcoin miners are altruistic, which is a hand-wavey assumption Blockstream makes about sidechain security. They think Bitcoin miners won’t attack sidechains because the miners will know they make more money over the long term by being honest. We have heard this before about large mining pools in Bitcoin. We’ve been told a desire to maximize long term profits is the reason no Bitcoin mining pool would ever exceed 51% of the network, but GHash.io has proven this theory definitively false.

As such, I’m relegating sidechains to the same place in my heart as Open Transactions. I’m waiting to see both approaches launch before I’m convinced you don’t need something like Counterparty to do a blockchain-based NASDAQ or Intrade. [2]

[1]: https://pay.reddit.com/r/Bitcoin/comments/2k01du/peter_todd_...

[2]: http://www.wired.com/2014/10/overstock-com-assembles-coders-...