Strong Federations: An Interoperable Blockchain Solution to Centralized Third-Party Risks (1612.05491v3)

Abstract: Bitcoin, the first peer-to-peer electronic cash system, opened the door to permissionless, private, and trustless transactions. Attempts to repurpose Bitcoin's underlying blockchain technology have run up against fundamental limitations to privacy, faithful execution, and transaction finality. We introduce \emph{Strong Federations}: publicly verifiable, Byzantine-robust transaction networks that facilitate movement of any asset between disparate markets, without requiring third-party trust. \emph{Strong Federations} enable commercial privacy, with support for transactions where asset types and amounts are opaque, while remaining publicly verifiable. As in Bitcoin, execution fidelity is cryptographically enforced; however, \emph{Strong Federations} significantly lower capital requirements for market participants by reducing transaction latency and improving interoperability. To show how this innovative solution can be applied today, we describe \emph{\liquid}: the first implementation of \emph{Strong Federations} deployed in a Financial Market.

• The paper proposes Strong Federations as Byzantine-robust federated sidechains that link to Bitcoin to provide faster, more private transactions with reduced reliance on centralized third parties.
• Strong Federations utilize features like Confidential Transactions for privacy and Federated Pegs for interoperability, enhancing security and efficiency for digital asset transfers.
• The implementation of Strong Federations, demonstrated by Liquid, facilitates secure digital asset exchanges and opens pathways for advancements in blockchain interoperability and security.

Strong Federations: Enhanced Blockchain Security and Interoperability

The paper "Strong Federations: An Interoperable Blockchain Solution to Centralized Third-Party Risks" offers a detailed exploration of improving blockchain systems to address limitations inherent in Bitcoin's architecture. The authors propose the concept of Strong Federations, which are Byzantine-robust transaction networks designed to offer more efficient asset movement with enhanced privacy and reduced reliance on centralized authorities.

Problem Analysis

Bitcoin's decentralized nature offers numerous benefits, such as counterparty risk mitigation and cryptographic ownership proofs. However, its proof-of-work mechanism introduces delays in transaction processing and poses privacy challenges. The latency derived from Bitcoin's block time inhibits real-time applications, requiring centralized solutions and exposing participants to third-party risks. Furthermore, despite popular belief, Bitcoin transactions are not anonymous, which limits commercial confidentiality and impacts fungibility due to traceable transaction histories.

Proposed Model: Strong Federations

Strong Federations operate as federated sidechains linked to Bitcoin, enabling faster and privately verifiable transactions. Utilizing functionaries—blocksigners and watchmen—these federations ensure the security and integrity of asset transfers without relying on a single point of control. This setup allows participants to retain spending authority while significantly reducing transaction latency.

• Federated Pegs: Facilitate asset movement between blockchains through distributed functionaries, maintaining decentralization while allowing interoperability.
• Byzantine Robustness: Offers protection against system compromise by ensuring that any minority of malicious nodes cannot undermine network integrity.

Key Contributions

The paper introduces Liquid as the first implementation of Strong Federations in a financial setting, designed to optimize Bitcoin's role in international exchanges. Liquid harnesses reduced transaction times and employs Confidential Transactions (CT) to offer privacy while ensuring publicly verifiable yet opaque transactions regarding asset types and amounts.

Technical Innovations

• Dynamic Blocksigning: Utilizes a $k$-of-$n$ signature scheme to accelerate transaction processing and eliminate reorganization risk.
• Confidential Transactions: Enhance privacy by obscuring transaction details while preserving verifiability.
• Hardware Security: Ensures key protection and system security against physical tampering.

Comparative Analysis

In contrast to traditional Bitcoin operations and alternative blockchain proposals, Strong Federations offer a unique balance between security, speed, and privacy. Unlike complex decentralized models such as GHOST or Tendermint, Strong Federations maintain simplicity with identifiable participants offering reduced trust assumptions. Additionally, by adopting Confidential Transactions, they mitigate privacy concerns more effectively than standard blockchain solutions.

Implications and Future Research

The adoption of Strong Federations could lead to significant enhancements in financial technologies by removing intermediaries and enabling more secure digital asset exchanges. Improvements in hardware security, the integration with Lightning networks, and further development of Confidential Assets are identified as future research directions to refine the capabilities and efficiency of the model.

In summary, Strong Federations provide a robust framework addressing key limitations of existing blockchain technologies, offering potential for broader application across industries reliant on secure, fast, and private digital transactions. The findings and innovations presented in this paper pave the way for further advancements in blockchain interoperability and security.