Behind Blockstream’s Bitcoin Innovations: Diving into Adam Back’s Creation

When people think of Bitcoin development, they typically picture volunteers distributed around the world collaborating under a shared interest. However, for several years now much of the development has been conducted by the private company Blockstream. Blockstream is a blockchain development and infrastructure company primarily focused on Bitcoin.

Founded in 2014 by Dr. Adam Back, the creator of HashCash (which is used in Bitcoin’s mining algorithm) and other Bitcoin developers, Blockstream has developed a range of technologies and commercial products for the Bitcoin ecosystem.

We are going to have a look at these different developments and what they mean for the future of Bitcoin.

Core Technology

Elements

Elements is an open-source blockchain protocol that people can use either as a standalone blockchain or a sidechain. Sidechains are essentially separate blockchains that run parallel to an original blockchain, like Bitcoin. The purpose of this is to delegate features to the sidechain such as more complex smart contracting capabilities or higher throughput that you are not prepared to integrate into the original blockchain.

Elements offers three main benefits: issued assets, confidential transactions and transactional interoperability. Issued assets allow for multiple distinct digital assets to be issued and traded. For example, you could have Bitcoin, Ether and a tokenized fiat currency all operating on the Elements blockchain.

Confidential transactions are a privacy feature that hides the transaction amount as well as what the digital asset is. By hiding the identity of the digital asset, it is impossible to distinguish between the Bitcoin, Ether and tokenized fiat currency that you are using. The interoperable aspect of Elements is very promising. It allows users to trade assets to and between other blockchains, through something called a two-way peg.

Blockstream used the Bitcoin codebase to develop Elements. Since it is still very similar, Elements offers an excellent playground to test more cutting edge technologies that might someday find their way into Bitcoin itself. For instance, the team is planning to deploy Schnorr Signatures on Elements prior to the Bitcoin Core team implementing it on Bitcoin. Schnorr Signatures are proposed to replace the current ECDSA signature scheme used on Bitcoin and would increase throughput and pave the way for various privacy upgrades.

Limitations of Elements

Elements does not use mining or proof of work (PoW) like Bitcoin but instead uses a signature federation scheme. It is essentially a proof of authority model, whereby parties referred to as block signers create and sign the blocks. Of course, this does not offer the same level of decentralization or immutability that Bitcoin does, as there is no game theory mechanism to prevent colluding between block signers in reversing or blocking transactions. Ultimately, Elements is for commercial usage between a small group of mutually-trusting parties as we will later see.

c-Lightning

You will likely have heard of the Lightning Network. This is a second-layer protocol, that provides very high speed and low-cost transactions and microtransactions, underpinned by the security of the Bitcoin blockchain. The network uses a form of smart contracts called payment channels.

There are currently three main versions of the Lightning Network: namely Lightning Labs’s Daemon, ACINQ’s Eclair and Blockstream’s c-Lightning.

c-Lightning, as opposed to Daemon, is being marketed by Blockstream to enterprise level usage more than anything else. In April 2018 Christian Decker, a Blockstream researcher, published an update to Lightning called eltoo. This promises to make the network safer and offers a new type of off-chain smart contracts called channel factories. c-Lightning is currently in Beta stage and we are not aware of any dates for when it might be fully live.

Privacy Contributions

Aside from these two core focuses, Blockstream team members actively contribute to Bitcoin Core code development and offer various improvement protocols.

The Blockstream research team has been participating in the development of Bulletproofs. This is a method to compress the size of confidential transactions and make them practical for integration into any cryptocurrency. The Monero team has already deployed Bulletproofs, and many people in the Bitcoin ecosystem see them as the best and easiest way to increase the privacy of the Bitcoin blockchain in the near term. Andrew Poelstra, a Blockstream researcher has also published a concept called Scriptless Scripts. This concept promises to increase the privacy of smart contracts, therefore developers could use it to increase the anonymity of all users on the Lightning Network.

Applications and Products

Satellite Network

Blocksteam’s work extends beyond just software and code. In 2017, the company began the launch of their own satellite network, which now covers the entire globe. Before this existed, the Bitcoin network relied upon the internet infrastructure staying functional. If there was a breakdown in internet connection in your area, it would be impossible to connect your node to the Bitcoin blockchain. The satellite network solves this problem and provides free to use 24/7 access to the Bitcoin blockchain for anyone.

To connect to the network, a node operator only needs a satellite antenna and a USB receiver. In total, this should cost less than $100. For those in remote areas with intermittent internet access, this network should offer much more reliability.

Liquid

The main application of Elements is Blockstream’s very own Liquid blockchain. Blockstream designed Liquid to facilitate the fast and private movement of liquidity between institutions. Confidential transactions ensure this privacy.

Instead of institutions moving their crypto assets around on separate blockchains, they can use the Liquid blockchain for faster and more private transfers. Additionally, the theory is, that by removing the need to transfer Bitcoin on the Bitcoin blockchain, space will be freed up and fees will be reduced for other Bitcoin users. Given the current 1 MB block size limit on Bitcoin, applications such as Liquid will be increasingly important for preventing the chain from becoming clogged up.

Since Liquid is based on Elements, it supports multiple crypto assets as well as tokenized fiat currencies all on its one chain. In addition to this, Blockstream says that it also supports tokenized securities.

Data Feed

Blockstream has partnered with ICE to create a cryptocurrency data feed. It is a commercial product and Blockstream is aiming it at traders and trading institutions. The data feed collects and presents real-time and historical cryptocurrency trading data. Currently, users have access to data for 15 separate cryptocurrencies and 17 fiat currencies.

ICE is the company behind the hotly anticipated Bakkt exchange and currently, owns the New York Stock Exchange as well as 11 other exchanges around the world.

Concluding Thoughts

Since 2014, Blockstream has developed itself into a behemoth within the Bitcoin industry. Right now, it is clearly aiming at becoming a key player in both the technological and financial infrastructure of Bitcoin.

Founded by academics and developers, it is unsurprising Blockstream plays an active role in code development. The team has a clear focus on improving privacy, as well as fungibility; something vitally needed not just in Bitcoin but in most other major crypto assets.

2019 should be a major year for the company. We are especially interested in the progress of its c-Lightning implementation of the Lightning Network and the success of Liquid.

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