Off-chain protocols for cryptocurrencies

Abstract

The limits of Bitcoin's scripting language motivate the need for off-blockchain protocols that extend the functionality of Bitcoin scripts. These protocols are run out-of-band by the transacting parties, but they are constructed in a manner that cryptographically binds them to on-chain scripts. Even with the advent of Ethereum, which provides a much richer scripting language, there are still privacy and scalability benefits to running off-chain protocols, even when on-chain analogs exist.

We present off-chain protocols for a variety of applications as well as a general framework for off-chain smart contracts. An important tool for constructing off-chain protocols is threshold-signatures, a primitive that enables distributing the signing power of a given public key into $n$ shares, such that at least $k$ shares are required to produce a signature from that key. We show how to construct threshold signatures that are compatible with Bitcoin, and we then use this primitive to build off-chain protocols for privacy-preserving access control and escrow services. Turning to more advanced smart contracts, we present off-chain protocols for the fair-exchange of digital goods and services for payment. Finally, we present Arbitrum, a private and scalable smart contract system which enables running arbitrary smart contracts for which the code is executed off-chain and disputes are resolved on-chain.