Building a Bitcoin Backed Data Market

Building a Bitcoin Backed Data Market

Computable’s data governance protocol creates a system for fairly valuing and governing a dataset. The mechanics of this system depends on a set of interlocking smart contracts currently implemented on Ethereum 1.0. Although this implementation works to build and launch an initial mainnet data market, it is not necessarily clear yet that Ethereum 1.0 offers a stable home for data markets long term. Major changes to the Ethereum chain are coming in the next few years. The addition of storage rent in Ethereum 1.x will require changes to ensure data storage remains stable, and Ethereum 2.0 cross-shard communication will require a large rewrite of contracts to maintain functionality. Furthermore, Ethereum’s monetary policy is not yet set in stone. There is discussion about potentially high risk steps such as introducing block rewards for development, which could potentially speed development, but perhaps at the cost of introducing corruption and hurting ETH’s position as a monetary store of value. If ETH does not function as a store of value, data market reserves would lose value and data markets based on Ethereum could potentially implode.

Given these uncertainties, it’s worth investigating whether data markets can be built on other blockchains. While there are a number of smart contract chains coming online such as Polkadot, Tezos and more, most of these platforms are considerably more unstable than Ethereum. It’s likely riskier to launch any high value financial system on such chains due to the fact that these systems have not yet been battle tested in any meaningful way. The one chain which is more stable and more battle tested than Ethereum is Bitcoin. However, Bitcoin’s lack of smart contracts means that it is not straightforward to directly port the current data market protocol implementation onto Bitcoin. However, Bitcoin development has evolved significantly over the last few years, and a number of layer 2 Bitcoin systems have been launched live such as the Lightning network and Blockstream’s Liquid sidechain. Basic understanding has built in the community of how to build protocols on top of Bitcoin.

In this note, I’ll outline a brief description of how the data governance protocol could be implemented as a Bitcoin sidechain. Before diving into technical details, let’s pause and consider the advantages of a Bitcoin backed sidechain. The Bitcoin community is serious about making Bitcoin into a global reserve currency. This focus has lead to the adoption of Bitcoin by a number of major financial institutions. As a result, Bitcoin liquidity is significantly higher than it is for other chains. At present, these funds have a dearth of use cases. Unlike Ethereum’s glut of DeFi projects, Bitcoin holders at present have few options beyond HODL’ing or opening a Lightning watchtower to put their Bitcoin to work. By enabling Bitcoin to back data markets, it might be possible to dramatically extend the amount of liquidity and investor interest in the Computable data market ecosystem and bootstrap the growth of the data economy.

The core technical innovation here is the notion of a Bitcoin pegged sidechain. This pegged sidechain is maintained by a small group of interested participants (the council for the data market protocol) who are responsible for on-boarding/off-boarding funds from the Bitcoin main chain and for signing sidechain blocks which track changes in sidechain state. The core funds in a data market sidechain would be governed by a Bitcoin multisig contract. Recall that multisig contracts allow for simple threshold schemes whereby m-of-n participants can vote to authorize a fund move. For example, a 10-of-20 multisig contract could govern funds in a data market sidechain with a council of 20 members, where a vote of 10 council members suffices to shift funds. To join the sidechain, a Bitcoin investor would send funds to the data market multisig contract. To exit the sidechain, a Bitcoin investor would request that funds be sent from the multisig contract to their personal address. As long as a quorum of the council is honest, funds can be securely on-boarded and off-boarded. The set-up is how Blockstream’s Liquid sidechain (which allows for rapid Bitcoin trading amongst trusted exchanges) works.

While the basic functionality sketched above allows for on-boarding and off-boarding funds into the data market, we have not yet explained how other data market functionality such as the market token, algorithmic pricing curve, listing ownership, or data access payments work. The core idea is that the sidechain maintains a simple blockchain which tracks these pieces of state. The market token can be maintained in a ledger on the sidechain, with minting and burning operations implemented by subsequent blocks. Data access payments could be implemented similarly with ledger pieces tracking outstanding byte access credits. The same goes for listing candidacy and rewards. For changes to the ledger state to be approved, consensus must be reached amongst the council members, who must choose to sign off on a block of state changes. Consensus can be reached by using an algorithm such as Tendermint. Block producers can be chosen in a simple round-robin fashion amongst the current set of council members.

It’s worth noting though that a core part of the data market protocol is that the council is not set in stone at the creation of the data market. Rather the council grows and shrinks dynamically depending on ownership of outstanding market token. The simple Bitcoin multisig does not allow for dynamic participation. However, a simple modification can allow for dynamic councils: construct a chain of multisig accounts. At some specified time interval, say every N blocks, have the existing council create a new multisig address and vote to shift funds there. The new set of multisig addresses should consist of council members at the present point in time. New council members may be added and some existing council members may be removed. So long as the council membership does not change radically in a short period of time, it will be possible for an honest quorum to transition control to the next council. Technically, what we are doing is transferring funds from say a m-of-n multisig into something like an m-of-(n+1) multisig or a (m-1)-of-(n-1) multisig as council membership shifts. So long as the current council is m-of-n honest, this transition can be made fairly. It follows then that a dynamic council can be implemented by a chain of multisign accounts.

It’s worth noting that this chain-of-multisig technique is generally applicable. Arbitrary DAOs can be built on top of Bitcoin by creating these dynamic pegged sidechains. In fact, I hypothesize that most protocols implemented on Ethereum can also be built on top of Bitcoin with custom sidechains in this fashion. If Bitcoin succeeds in its ambition to become the world’s reserve currency, these Bitcoin backed protocols will become a critical layer of functionality on top of the core Bitcoin protocol. At present, Bitcoin development is significantly more challenging that Ethereum development and only a few firms like Blockstream and Lightning labs have built up the needed expertise. But it seems likely that as Bitcoin’s adoption spreads, this state of affairs will begin to change as well.

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