Proof of Stake Bitcoin Sidechains

Proof of stake is another consensus protocol that has been used on multiple block chains for quite some time now, there was a proposal on the Bitcoin-dev mailing list to attach proof of stake sidechains to the original Bitcoin blockchain. This allows for the development of decentralized networks which aim to manage reserves of Bitcoin, using custom application code and smart contracts that use Bitcoin as the native currency.

Proof of stake chains often have problems like long-range attacks, these side chains on the other hand would avoid these attacks by timestamping the sidechain on the Bitcoin blockchain, gaining its security from Bitcoin’s own proof of work chain. One way to implement this, proposed by developer Matt Bell, is to make a pegged network with a single deposit address called the reserve witness script. On Bitcoin’s main chain, every user of the pegged network would have a compatible public key and an integer amount of “voting power”. Any user wanting to add more “pegged Bitcoin” to his address on the pegged network would make a transaction to the reserve witness script on the original blockchain with only two outputs. A Pay-to-witness-script-hash and a script which commits to a destination address which will receive the pegged Bitcoin.

Withdrawals from this reserve wallet requires more than two-thirds of the validators of the peg network to agree on this withdraw as a means of securing the chain from a 51%-like attack. Another implementation was proposed by developer ZmnSCPxj that doesn’t require any modifications to the Bitcoin mainchain, this was further discussed on the mailing list here.

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