Bitcoin, Digital Gold

While private investors and many companies are rushing to Bitcoin because of its safe haven character, many technological advancements continue to make Bitcoin increasingly attractive in terms of its programmatic potential, privacy and scalability.

In the past weeks, I have presented you with various projects that often go unnoticed by the common man, but which contribute greatly to making the network as robust as it is today. For those who wish to delve into these topics in more depth, after reading this article of course, you can read about coinjoin anonymization techniques here, or explore the concept of Discreet logarithmic contracts (DLC's) here.

Another second layer solution, the "Statechains".

This week's topic turns out to be another second layer solution of Bitcoin called "Statechain". Again, you might say? Well yes, because of the immutable nature of the first layer of Bitcoin and its gradual ossification, we may see a proliferation of such solutions on Bitcoin in the years to come.

The architecture and concepts of the second layers are varied, but all seem to offer essentially the same advantages to varying degrees in terms of programmability, scalability and privacy. Considering that transactions beyond the first layer are not written directly into the Blockchain and are not constrained by the rules of the protocol, it is normal to see this set of advantages being brought by each of these solutions.

The solution presented today, the Statechains protocol, therefore also boasts all of these advantages.

The merger of two pre-existing solutions

The solution will be presented for the first time in 2018 at the Scaling Bitcoin conference in Tokyo by Ruben Somsen, a Bitcoin developer and researcher and founder of the Seoul Bitcoin Meetup. Due to the highly technical nature of the conference, the solution went slightly unnoticed, but still managed to spark a buzz among the geekier Bitcoin community.

The use of a Statechain is based on the creation of a 2-on-2 multi-signature contract (similar to the creation of a liquidity channel on the Lightning Network), with a Statechain entity that has a structure similar to that of a federated Sidechain.

Statechains are therefore often presented as a solution combining the mechanics of the Lightning Network and a Federated Sidechain.

The user who wants to convert bitcoin, and thus a UTXO (Unspent transaction output), will simply transfer it by transmitting the private key associated with it to the Statechain entity, which will then transform it into a transitory key through their own signature that will be added to it.

The possession of the UTXO is thus transferred outside the first chain with a guarantee of redemption of the UTXO on the first chain in case of disappearance or attempted collusion of the Statechain entity.

We will use a diagram to better illustrate the concept. In the image below the Statechain entity is illustrated by the letter (A), the user Bob by (B) and the user Carole by (C). The letter X corresponds to the transitory key created thanks to the Statechains protocol.

We can see that the transactional states of the first layer of Bitcoin and Statechain are placed side by side to illustrate their updating which is done in a parallel, or more precisely atomic, way.

Bob (B) performs a regular Bitcoin transaction with the Statechain entity (A) which will ensure that the transitory key X is embedded in the particular UTXO sent there. This transient key can then be transferred out of the chain indefinitely.

In this case, as soon as the UTXO is transferred to the Statechain, a transaction is also created ready to be published on the first layer in case Bob changes his mind and wants his funds back.

The transactional state of the Statechain stated that the last owner of the UTXO, and the only one at this time, is Bob.

Bob can then transfer his UTXO to Carol (C ) for any reason. The transitory key (X) will then be shared equally with her and a UTXO redemption transaction will be pending on the first layer.

Since the transitory key (X) is now known to many users, they would all have the ability to claim UTXO.

It is at this point that the Statechain entity (A) has its role to play by promising to apply its corresponding signature to the multi-signature contract only for the last legitimate owner of the UTXO. The entity thus serves as an arbitrator. The risk of collusion is mitigated through a federation and multiple parties that must approve the application of the signature through the advanced cryptographic signature method known as Adaptors Signatures.

The Statechain entity also has the incentive to be honest, as it is required to publish all the signatures it applies. In the event that it still decides to cheat in any way, the attempted fraud would be cryptographically provable.

In the event that the Statechain disappears, the last user in possession of the unpublished transaction of the first chain would be able to recover the funds thanks to it. However, to ensure that a user and previous owner of the UTXO does not use this scheme to steal the funds, the Eltoo method is necessary. It is a mechanism that allows skipping all the transitory steps of a payment channel and was mainly developed for the Lightning Network.

Having said that, the description of Statechain was simplified to the maximum, but collects a set of innovations of all kinds such as Schnoor Signatures, anonymization techniques similar to Coinjoin, the ability to run parallel to the Lightning Network and much more.

Theory is good, practice is better

The practical implementation of the Statechain is already underway. Commerce Block recently announced the launch of the Mercury Statechain in beta mode using Bitcoin tesnet.

The implementation of the statechain protocol is now completed with a fully functional API (Application Programming Interface).

The company's goal is to facilitate the transfer of Bitcoins in a fast and cost effective manner and to create an anonymous place where users can exchange UTXO atomically (see Atomic Swap).

It still lacks the wallet interface on the user side before being a project that can be used by a large number of users.

Follow the links above to experiment by yourself with this new technology. Hopefully it will fascinate you and make you even more optimistic about Bitcoin.

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