Bitcoin, Blockstream, Sidechains, and Innovation.

Pick any one component of the bitcoin ecosystem and one company that you consider truly innovative in this component. What type(s) of innovation does it offer, e.g. in terms of the 4Ps framework? Would you consider this a disruptive innovation? Justify your answer.

Since its inception in 2008 [1] the Bitcoin ecosystem has been slowly expanding. In recent years the expansion has accelerated. Investment in Bitcoin and blockchain related companies reached almost a billion dollars in the last 24 months [2]. Many commentators, speculators, investment professionals, and seasoned entrepreneurs argue that the potential of the blockchain technology may rival that of the Internet [3] [8]. A number of companies have been started whose sole purpose is to provide bitcoin related products and services. Some of those companies provide services that are obvious but nevertheless needed. Others have been coming up with ideas that are rather new and unexplored. One could argue that a few of these companies are truly innovative. We will concentrate here on the so called Crypto 2.0 space – services provided on top of the Bitcoin blockchain. One such innovative company is Blockstream. In late 2014 the company released a proposal called pegged sidechains. We will used this company and its proposal in discussing Bitcoin related innovation.

A full analysis of pegged sidechains is beyond the scope of this paper; a good explanation can be found here [6] and in [7]. Essentially sidechains allow other blockchains to coexist “along” the main Bitcoin blockchain. The reason that they are called “pegged” is to allow transfer of assets back and forth between the main, parent chain – Bitcoin, and a newly created sidechain. This in turn will allow for experimentation with blockchains on the most secure network. Users and investors, who in the past would have to buy newly created tokens on a newly created blockchain, now can have the confidence of having the new assets backed by bitcoin. This removes a major obstacle in adopting a new blockchain. Of course sidechains offer possibilities not yet imagined and implemented.

Innovation.

The sidechains project is innovative without a doubt [4]. Blockstream, the company behind it, assembled a team of who is who in the crypto space and raised a large amount of money. The innovation can be viewed as a paradigm innovation. Projects that hereto started with their own new blockchain, can now take advantage of everything that the Bitcoin blockchain has to offer. In a way this is a paradigm change – from disjoint projects to a way of tying a new project to the oldest blockchain in existence. However, one could also argue that sidechains are an example of platform innovation. Platform, because sidechains offer tools and an ability for others to build on top of it. Using the sidechains “platform” developers can dream up ways of utilizing the new tools to build new services. One could even foresee a stock exchange being built using sidechains. However that is only one quick example.

Sidechains do have the potential to be disruptive [10]. If the concept gets wide acceptance there is no telling what kind of existing services/products can exist on the blockchain that were previously considered not to be viable on a separate blockchain. One could definitely imagine the disruption it could bring to many fields. However, to be disruptive a concept must be adopted by the mainstream, and in technology that is not always a given, even when the service/product in question is superior. Bitcoin is considered a disruptive innovation by many, but mainstream adoption is either decades away or it may never happen [9].

Conclusion.

The Bitcoin ecosystem is constantly expanding. More and more companies are providing services related to bitcoin. Pegged sidechains by Blockstream present an interesting concept. We argue that the concept is very innovative and if it finds acceptance it may even be disruptive. Pegged sidechains are an example of not only paradigm but also platform innovation. We are following the project with great interest to see if it lives up to its potential.

References.

[1] S. Nakamoto, Bitcoin: A peer-to-peer electronic cash system, 2009, https://www.bitcoin.org/bitcoin.pdf
[2] http://www.technologyreview.com/news/537061/bitcoin-entrepreneurs-scramble-to-appeal-to-the-masses/
[3] http://www.bloomberg.com/news/videos/b/754d07ec-00f0-4e5e-9aae-bab5db69073e
[4] http://bravenewcoin.com/news/blockstream-their-allstar-team-and-sidechain-innovation/
[5] www.blockstream.com/sidechains.pdf
[6] A. Szmigielski, Analysing the potential of Bitcoin Sidechains, 2015, https://diginomics.com/analysing-the-potential-of-bitcoin-sidechains
[7] http://www.reddit.com/r/IAmA/comments/2k3u97/we_are_bitcoin_sidechain_paper_authors_adam_back/
[8] http://www.businessinsider.com/how-bitcoin-may-have-more-impact-than-the-internet-2015-2
[9] https://en.wikipedia.org/wiki/Disruptive_innovation
[10] https://bitcoinmagazine.com/20763/blockstream-moves-ahead-sidechain-elements-first-implementation-sidechains/

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