State Chain Network
Statechain is a second layer solution developed by CommerceBlock, which is aimed towards enhanced privacy. As Bitcoin’s main chain records the transaction history of every Bitcoin, one has to be vigilant to keep their privacy with regards to hodlings (although if you use centralised exchanges, that may be tricky)!
The way statechains work is similar to the Lightning Network in that multiple users need to verify and “sign-off” a transaction before it can be completed. With statechains though, 2 private keys are needed to sign off the transaction, with one private key belonging to the user and the other private key belonging to the provider of the statechain (e.g. Mercury Wallet).
Effectively, the user needs to send the private keys (“transitory key”) to the wallet of a fixed amount of Bitcoin, to the receiver in order to pass on the funds.
Now this may seem to go against the ethos of Bitcoin by handing over your private key but the statechain provider “promises to only cooperate with the last user that received the transitory key” and it’s worth noting that at all times, the user can take out their funds, meaning that statechains are non-custodial.
There is an element of trust involved where the statechain providers do not collude with a previous private key holder. However, if such a collusion would occur with a previous owner, the current user would know about this anyway so is never likely to happen. There’s also other factors that make statechains more secure:
- Employees of the statechain provider must disclose every signature,
- There is a group/federation of ~10 members of the statechain provider who would all have to collude together but they could only block transactions, not take funds. A federation will exist after the Taproot Upgrade happens though.
- Every transaction has a different transitory key, which means a different set of prior users, meaning a bad actor would have to track down all those prior users, who would then have to agree to do bad things.
With all things considered, it’s very unlikely collusion will occur and a bad reputation of statechain providers will spread like wildfire if any foul play is uncovered.
With statechains, the amount of Bitcoin to be sent in a transaction is fixed once a user creates the statechain from mainchain (i.e. the UTXO) and cannot be split into different amounts.
For example, if you want to send 1 Bitcoin in one transaction to a friend (lucky them) and you create a statechain, you can’t then send 2 x 0.5 BTC transactions, it has to be 1 x 1 BTC as that is the UTXO which defines the amount to be sent. For multiple, smaller transactions, it’s better to use the Lightning Network.
Statechains use case comes from being able to send large amounts privately, instantly and directly by simply transferring the private key from one user to the other.
With Lightning, there are multiple payment channels that need to be relied on being topped up, which can cause liquidity issues. There is no liquidity required on statechains as it’s provided
Statechains moves transactions off the main chain and on its own chain, which is a collection of state and allows for instant and very low fee private transactions.
Other privacy services such as CoinJoin are done on the main chain, which leaves an “imprint” on the Bitcoin that raises red flags if you try to send that “tainted” Bitcoin to centralised exchanges.
However, CoinSwap can and will be done on the statechain as privacy costs are significantly reduced.
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