Digital Currency Perspectives
March 17, 2015

The “Blockchains” of Bitcoin 2.0

Bitcoin is built on a distributed consensus technology – the blockchain – which allows transactions to be verified and securely stored without a centralized authority authenticating the transactions.  In its current form, the blockchain serves as a ledger for digital currency.  However, developers with a sophisticated understanding of cryptography seek to utilize the blockchain in alternate ways.  The concept of Bitcoin 2.0 has consequently emerged, and is generally defined as use of the blockchain infrastructure to handle a limitless range of non-digital and non-financial transactions.  For instance, entries in the blockchain could represent “virtual” keys that could be used to claim ownership of physical assets such as cars, patents, or even wills.

Since the Bitcoin blockchain was not created with other digital assets in mind, adapting the technology to alternative uses is “a little bit of a hack, really.”  One response to this incompatibility has been the creation of alternative blockchains.  Ethereum is one such platform that enables distributed applications and smart contracts using its own native currency, ether, as the liquidity cover for transactions.  The transactions are written in code and embedded in the platform based on user data sources or other contracts.

Another response has been the creation of sidechains, or ledgers designed with a specific purpose in mind. Sidechains are pegged to Bitcoin; no separate platform is created.  Instead, multiple blockchains are interconnected with the Bitcoin blockchain and each other.  In a transaction, the value of the coin would be transferred from the bitcoin blockchain to the sidechain.  The coin, now on the sidechain, can move to other sidechains or back to the Bitcoin blockchain, activating the original coin again on the Bitcoin blockchain. Blockstream is one company steamrolling these efforts.

Hyperledger has also emerged as a decentralized ledger platform that represents assets without a native currency or blockchain.  The platform registers the ownership of an asset through a network of distributed nodes, creating a cryptographically secure ledger.  Each asset has its own ledger, and nodes relay the transaction upon reaching consensus (2/3 of the nodes need to agree on the validity of the transaction before it is confirmed).  The platform allows users to engage in peer-to-peer transfers of currency, financial instruments, or the rights to physical assets.

To date, it is unclear which of the above innovations, if any, will prevail.  But it’s safe to assume that developers are likely to make Bitcoin 2.0 a reality.