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In October several prominent figures in the Bitcoin development community launched a start-up to considerable fanfare in the technology and finance worlds. San Francisco–based Blockstream aims to take the encryption technology that Bitcoin is built upon — the blockchain — and improve it in ways that will, its founders say, “transform global systems of value exchange.” The company calls these improvements sidechains.

But ask Austin Hill, chief executive and co-founder of Blockstream, to explain — in less than one minute and using terms intelligible to a lay audience — what sidechains are and how they might help institutional finance, and he launches into a meandering answer that begins, “I think the analogy that’s been used is the TCP/IP and routing infrastructure that existed before the consumer Internet.” By the time he has finished, six minutes later, he has dropped in unexplained references to “hash power,” the blockchain’s “hash rate,” “industrial mining centers” and “the SHA-256 algorithm” before concluding with a brief digression on how 98 percent of developers of alt.coins, or alternative, Bitcoin-like cryptocurrencies, are “attempting to pump and dump an asset class.” This, Hill says, confirms that there is a “Wolf of Wall Street–style dynamic at work in much of the Bitcoin world,” referencing Martin Scorsese’s 2013 film about a corrupt stockbroker.

Bitcoin is regularly accused of having both a complexity problem and a hype problem. Skeptics contend it’s too complicated for the ordinary person to understand, much less use, so it will never gain traction beyond a computer programming–savvy minority. This, in turn, means the alternative currency is perennially overhyped. Like the old joke about Brazil, critics say Bitcoin is the currency of the future — and always will be. On the evidence of Hill’s answer, the blockchain looks likely to inherit some of these problems, especially when it comes to complexity.

But will that even matter? The developers at the vanguard of Bitcoin’s brave new era are confident it won’t. In their view, the blockchain makes it possible to create an Internet of value. These opportunities to “introduce massive savings and remake entire fortunes and create new types of companies are going to draw a huge amount of innovators who just see a better way of doing things,” asserts Hill.

The blockchain is a distributed public ledger of transactions, made possible by advances in cryptography, game theory and peer-to-peer networking; the last allows for the transfer of any unit of value in an entirely decentralized way, without intermediaries such as banks. It’s a trustless system in the sense that users don’t need to rely on a third party to process a transaction. To date, the blockchain has been used as a way to move one particular type of asset around the world: Bitcoins. Blockstream’s founders are betting that the blockchain will be far more interesting and powerful as a technology once it is applied to the myriad other assets in circulation, especially digital ones such as financial securities.

They’re not the only ones making the argument. CoinDesk, a London-based Bitcoin data firm, estimates that the digital currency has received almost $340 million in venture capital investment since its birth five years ago. Most of that has gone to projects focused on payments and currency, but many members of the cryptocurrency community now believe that Bitcoin proper will be left behind as developers focus on applying the underlying technology to new areas.

“The steam engine was a great breakthrough, but it took quite a few years to get to the optimal steam engine,” says Dave Birch, an analyst at Consult Hyperion, a Surrey, England–based electronic transactions consulting firm, who is one of the global cryptocurrency community’s leading thinkers. The future of Bitcoin may not be Bitcoin at all.

Sidechains, Hill says, will accelerate the pace of innovation in Bitcoin’s underlying infrastructure. In a post on LinkedIn published at about the same time as Blockstream’s launch, Reid Hoffman, a partner at Menlo Park, California–based venture capital firm Greylock Partners, wrote that these improvements will eventually turn the blockchain into “the kind of open, highly adaptive platform upon which a vast array of complementary products and services can be built.” Hoffman was one of nearly 40 investors to contribute to Blockstream’s seed round, which attracted a string of high-profile backers — including Google chairman Eric Schmidt’s Innovation Endeavors and Yahoo co-founder Jerry Yang’s AME Cloud Ventures — and raised $21 million by the time of its close in mid-November. Blockstream’s success, Hoffman predicted, “will in turn generate new waves of technical and entrepreneurial innovation.” Like many of Blockstream’s 11 founders, Hill, a technology industry veteran, has a long-standing member with Bitcoin’s core development team, a loose central community responsible for keeping the cryptocurrency’s programming house in order.

Once the blockchain is enhanced, developers will come in and build ... well, what exactly? This is where things become less clear. The idea that most excites Hill and others in the Bitcoin community is the possibility of using the blockchain to eliminate the cost and time of clearing and settling financial assets, which even today require two to three days of posttrade processing. “That is a legitimate objective right now,” says analyst Birch.

But beyond that the potential product road map gets muddled. Hill speaks of reconfiguring protocols widely used in the capital markets, such as SWIFT (for messaging) and FIX (for trading), to run off the blockchain. He also sees a use for the technology in allowing exchanges, clearinghouses and other financial intermediaries to perform their functions in a way that creates liquidity and increases efficiency without requiring those institutions to warehouse actual assets, which will sit instead on the distributed blockchain. This, Hill asserts, will reduce systemic risk.

Others are big on the idea of using the blockchain to enable real-time auditing of financial transactions, to prevent fraud and malpractice: In theory, it will eventually be possible to cryptographically encode a reinsurance agreement, for instance, to make certain it doesn’t exceed regulatory leverage ratios, or to build a chain of transparency across the entire asset web underlying a complex derivative.

The question of what happens to the institutions on Wall Street in a blockchained universe is less certain. “Some intermediaries are going to get replaced by blockchains completely, but others will still have a role,” predicts Vitalik Buterin, a 20-year-old hacker who one year ago founded Ethereum, a Zug, Switzerland–based nonprofit organization also developing noncurrency applications of the blockchain. Hill provides a similarly elliptical prognosis. “The whole system can start to be rethought and rearchitected in some pretty interesting ways,” he says, adding that it will be a half decade or more before these changes start to take shape.

Financial institutions may gain or lose from the advent of the blockchain — at this stage it’s difficult to tell. But even though Wall Street today is a complex network of interlocking relationships and embedded interests, companies like Blockstream and Ethereum believe they will help force a tectonic reshaping of the industry. The U.S. government tried something similar with the Dodd-Frank Wall Street Reform and Consumer Protection Act, and its efforts have met with fierce resistance and only partial success. What makes blockchain developers think they will succeed where Washington’s lawmakers, acting with the legitimacy of government and the mandate of a financial crisis behind them, have found the going so tough? “The answer becomes one of innovation, network effects and self-interest,” Hill says. This is a variation on an old idea: If the blockchain is built, the innovators will come. Eventually, incumbent financial institutions will be forced to adapt or perish, the logic goes.

Today much of the thinking about the blockchain’s applications to institutional finance remains grandiose and undetailed — perhaps understandably given the technology’s early stage of development. Much of it presupposes that blockchain-based applications will be simple and trustworthy enough for investors to use with confidence. That’s still a moot point, even though Hill contends that Blockstream already has a diverse stable of clients interested in its technology, from national governments that are exploring issuing their fiat currencies on the blockchain to gaming companies that want to use the blockchain as the basis for value systems in virtual reality. Bitcoin, meanwhile, has seen its price fluctuate wildly since its birth in 2009. The alternative currency spiked above $1,100 in November 2013 before losing half that value in the month that followed; there have been wild swings in the year since, with a single Bitcoin now trading at about $350. The aggregate value of all Bitcoins in circulation today is close to $5 billion.

The way Hill paints it, the development of sidechains will avoid much of the fuss over complexity and volatility that has bedeviled the growth of Bitcoin. This is because sidechains, by their very nature, are complex things to build; at their essence they are incremental additions to the blockchain that allow individual blocks to connect to one another and on which useful products can be built. It doesn’t matter that this process is hard to understand.

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