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December 4, 2020

Market Spotlight

Exploring Statechains as an Answer to Bitcoin’s Scaling Issues, With CommerceBlock


London-based CommerceBlock is a Bitcoin blockchain infrastructure development firm that launched in 2016. They are focused on integrating BTC into enterprises and retail apps in addition to Bitcoin scaling solutions. Nick Gregory, CEO of CommerceBlock, joined Paul Gordon, editor of Coinscrum Markets, to discuss the company’s latest developments. 

Bitcoin scaling solutions are a hot topic currently, with sidechains and second-layer solutions like Lightning Network holding a great deal of promise. But there’s still a great deal of work left to be done. A blockchain is basically a database of crypto-graphic proofs and it’s a finite resource. A sidechain is essentially a data structure on top of that existing blockchain, but it doesn’t have the same security constraints. It’s a bit lesser, Nick explained. BlockStream is an example, and it is structured as a federation of members in which people can move their coins into a less secure space in exchange for higher throughput. 

(3:16) “So basically what we’ve seen with Bitcoin is that block size is limited, and it’s premium real estate. And there’s competition for that real estate. So by going onto a sidechain, you’re essentially going onto another blockchain but you’re pegging from the original Bitcoin blockchain into a blockchain that arguably relaxes a lot of those requirements,” said Nick. 

Ethereum as a Sidechain to Bitcoin 

In the past year, Ethereum has become a sidechain to Bitcoin, Nick explained, adding that a lot of the wrapped Bitcoin in the DeFi use case was Bitcoin wrapped in an Ethereum construct but traded inside of Ethereum. One could argue that Ethereum has become a sidechain for Bitcoin because of DeFi. 

(5:26) “None of these sidechains are arguably truly decentralized. You’re always trusting either one person or a group of people,” said Nick. 

Lightning Network 

The Lightning Network differs from sidechains in that it is more like a cache of transactions that sit on top of the blockchain. It’s akin to a payments channel. For example, you can take some BTC, lock it in a payment channel and send it in an off-chain transaction to somebody else. 

There is a great deal of complexity involving a network of nodes, Nick explained, which requires a lot of liquidity to be locked up. At any point in time, the user can close their payment channel and that will basically settle on the Bitcoin network. There are some limitations, such as there must be a network operating that has enough liquidity. And the user’s Lightning payments wallet must always be running and online. So there are constraints. 

(7:05) “It’s been a slow journey with Lightning. I think one of the issues with Lightning is probably a human thing. Many people don’t want to spend BTC at the moment. It’s gone into this store-of-value mode. But there are some use cases around micropayments, where we’re starting to see it prop up. It’s a complicated project, but it’s slowly getting that liquidity. But it’s been a slow journey,” said Nick. 

The UI experience is different because you always have to have your wallet online. As a result, some people have been using custodial wallets as opposed to non-custodial wallets. 

Trading Venues 

Scaling solutions have tradeoffs. One of them is that exchanges are very much the gatekeepers of the way people trade. And exchanges don’t necessarily want people to move their funds off easily. The challenge with Lightning, Nick says, would always be liquidity, as you’ll have to have a lot of it locked up in payment channels to move that amount around.

With sidechains, transactions will never be instant. Even with a federated network, you’re still looking at one-to-two minute block times. It comes down to adoption, Nick said, adding that you’re going to have to get multiple exchanges agreeing to it. We’ve seen batch settlement, but things will likely change when the bitcoin price goes up in terms of transaction fees. 

(9:43) “We haven’t seen the bitcoin transaction fees of 2017 yet, which I think were around USD 30. I remember in 2017, I may have done a few transactions that were over USD 50. At the moment, you can still do most of your work for USD 5. But with a bull run coming, I think people are going to start to look at that because it’s going to be very hard for traders to arbitrage across  exchanges and move instantly,” said Nick. 

Space Savers: Taproot and Schnorr 

The blockchain is a finite space. It’s important to keep the Bitcoin blockchain decentralized, but at the same time the industry needs to be optimal about how they use the space. Schnorr signatures allow us to compact by using multiplication, explained Nick, compacting multi-sig into the same space as single-sig. As a result, multi-sig is not so expensive and we’re going to save an amount of space there, he added. 

Taproot allows complicated scripts to only reveal their ultimate destination. So that’s going to save space and allow more privacy-type technology to be built on top of it. 

(13:25) “So I think what we’re going to see once taproot and schnorrs are allowed, we’re going to see a lot more creativity in terms of smart contracts, ways to save space on Bitcoin that we have not seen before. And I think there will be a few years of innovation that’s going to get a lot of people excited in the privacy space and in terms of smart contracts, we could build in Bitcoin, which we couldn’t do before. Potentially we could do things like covenants, conditional payments, etc, that weren’t exactly possible,” said Nick. 

Bitcoin will be used more as a settlement layer. 


The original paper on statechains was written in 2018. It came out with the idea that there was a lot of dependency on future upgrades to Bitcoin that are not there currently, such as Schnorr and layer-two. The problem with discreet contracts, which are a way to do smart contracts on the Bitcoin blockchain,is that say, for example, two people enter into a bet on the price of bitcoin. In this case, both of their capital would be locked up in a private key. Commerce Block looked at statechains as a way of novating capital and novating the lockup. 

(15:35) “Essentially statechains, at a very high level, are a way of transporting your private key to someone else. Obviously, that sounds really simple. I have a private key that has a couple of BTC in it. I can now give it to you Paul, and great, you’ve got my private key. But the issue there is, what if I remember the private key? I now can spend that money. So there’s a lot of complicated maps to ensure that I can’t spend that money after I’ve transferred it to you.” 

From a scaling perspective, statechains are great because now the user can just move private keys around. But that does come with many issues, which CommerceBlock believes it’s solved using   today’[s version of Bitcoin. The company uses relative time blocks, so there’s a period of time previous owners cannot potentially take the bitcoin. 

One of the key features is that it’s non-custodial. It’s non-censorship resistant. If the statechain entity was to be taken down, a user wouldn’t be able to send their bitcoin anymore. But they would at any point in time be able to withdraw their bitcoin. Additionally, the transactions are all off-chain, so there’s no imprint onto the bitcoin blockchain, which in turns makes it very scalable.

The biggest limitation to statechains is the fact that users are moving private keys around. So if a user’s private key has 4.1 BTC, they can only send another user 4.1 BTC. This is the tradeoff, said Nick, adding that you have to send the full amount. 

CommerceBlock does not consider itself a competitor to the Lightning Network in any way and according to Nick statechains actually complement the Lightning Network quite well. 

Use Case 

CommerceBlock is “code complete” on the backend and they are in the process of making a “very easy to use UI,” said Nick. It will be a tool that lets users deposit coins and then send them around privately. They’re hoping to be in test mode in January and in production some time after that. They won’t release it until they’re sure but they see it as being an off-chain scaling solution with privacy. Everything CommerceBlock is doing is open-source. 

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Gerelyn Terzo
Gerelyn caught wind of bitcoin in mid-2017 and after learning about the peer-to-peer nature of Satoshi's creation has never looked back. Previously she covered institutional investing and fintech for several major trade publications. Gerelyn resides in Verona, N.J.

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