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Suppose I have my own sidechain and have created a transaction of 100 BTCs from Bitcoin network to my Sidechain. To my understanding, this means 100 BTCs are now locked on Bitcoin Network and 100 pegged BTCs have been created in my sidechain.

Q1. What kind of address will hold these 100 pegged BTCs in my sidechain? Is it an address same as Bitocin wallet address?

Q2. Suppose Alice have 100 pegged BTCs in address A of sidechain, Alice made a transaction of 50 pegged BTCs to Bob which has another address (say address B). We now have 50 pegged BTCs in both address A and address B. How will Bob redeem pegged coins back to real BTCs in Bitcoin Network? Because if we see in Bitcoin's point of view, Alice is the authorized user to spend or redeem her 100 pegged BTCs back to real ones. Whereas Bob does not exist for Bitcoin Network who claims to possess 50 BTCs.

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  • Welcome to Bitcoin.SE! A doozy of a question - I don't think you can do it.
    – Willtech
    Feb 27, 2018 at 11:28
  • @Willtech You mean transactions are not possible in sidechains?
    – Gagan
    Feb 27, 2018 at 11:30
  • Hmm make sense. Then what use case sidechains have? What benefits does it brings when pegged to bitcoin network?
    – Gagan
    Feb 27, 2018 at 11:42
  • because you can build a whole new set of rules for transactions on sidechains. There you can create new logic, which is difficult to implement in bitcoin network, or doesn't need its high level of reputation/security/stability/availability... e.g. buy a coffee for very little tx fees. Or create smart contracts, that extend to the layer of OP-Codes. Or do whatever business logic you can think of. At one point in time the sidechain must make sure, that the right amount of bitcoins (a transaction) comes back to the bitcoin network. Otherwise bitcoin network will reject invalid tx.
    – pebwindkraft
    Feb 27, 2018 at 12:01
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    Sidechain is a blockchain that runs in parallel to the main blockchain which extends functionality through interoperable blockchain networks allowing a decentralized way of transferring/synchronizing your tokens between the two chains. pegged sidechains whitepaper
    – Willtech
    Mar 5, 2018 at 20:36

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Q1: It depends on the sidechain. Every sidechain can implement their own rule to create and represent/encode adresses.

Q2: This is an active area of research. Some people propose implementing sidechains via Zero-Knowledge proofs or other ideas that either require Bitcoin rules to change or mining cooperation or both. Some sidechains already deployed, like RKS, propose there are a set of nodes you trust to hold custody of bitcoins transferred to the sidechain, much like a bank.

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