At the protocol level, Bitcoin intentionally lacks some of the complexity required to create a fully decentralized financial system. For instance, it has only one type of asset — Bitcoin — and can only enforce relatively simple conditions on how bitcoins are used.

Past efforts to increase the capabilities of blockchains have taken two primary strategies:

Create an alternative blockchain, totally separated from the Bitcoin network. These are called “altcoins”. Create a supplementary protocol. These include meta protocols such as Omni, and sidechains like Rootstock, all of which rely on the Bitcoin network to some degree.

Zen takes a new approach: a parallel blockchain which observes the Bitcoin network. This means that Zen can work with Bitcoin, without being limited by Bitcoin’s consensus rules.

How it works

Zen miners put commitments to the state of the Bitcoin network in the blocks they mine. Before building on top of a block, other miners will check that the Bitcoin commitment is valid. Initially, this just means checking for a good header, but after a grace period, the whole block is checked according to the full Bitcoin rules, and the best valid chain is agreed on as part of Zen’s consensus. (The delay means that Zen can cope with small reorganizations of the Bitcoin blockchain.)

The result is that Bitcoin consensus is part of Zen’s consensus, and the Zen blockchain runs in parallel to Bitcoin — what we call Merged Consensus.

This lets smart contracts on Zen react to what happens on Bitcoin, allowing them to take the state of the Bitcoin blockchain as an argument, and enabling cross-chain contracts.

Some examples:

Decentralized cross-chain exchange/swap: Zen tokens can be held in a smart contract, and released to whoever sends Bitcoins to a certain Bitcoin address.

Bitcoin crowdsales: Developers can accept Bitcoin in their token sales. All the user needs to do is send BTC to a certain address.

Contract payments: Alice can write a contract to Bob, and Bob can prove he paid Alice by submitting a proof to the Zen network.

Collateralized service providers: Bitcoin service providers can use a Zen smart contract to provide users with an effective course if they fail to perform. Collateralization can either substitute, or complement, a traditional risk assessment based on reputation.

In Depth Example: a Decentralized Cross-Chain Exchange

The party interested in selling an asset on the Zen network sends it to a smart contract that:

Observes the seller’s Bitcoin address.

Releases the asset to whoever sends bitcoins to that address.

2. Buyer sends bitcoins to the seller’s Bitcoin address, together with an instruction about where to send the tokens on the Zen network.

3. Contract sends tokens to buyer’s Zen address.

This creates immediate liquidity between any Zen token and Bitcoin.

This is just the tip of the iceberg of what can be done with Bitcoin integration. Just knowing the unspent transaction outputs in Bitcoin lets the Zen Protocol respond to Bitcoin transfers. However, full Bitcoin integration — which tracks everything in the Bitcoin blockchain — lets us do more. As a simple example, knowing Bitcoin’s difficulty allows for Zen contracts that pay out based on Bitcoin’s difficulty — that is, for difficulty derivatives.