Sidechains are like independent branches that operate alongside a main blockchain network, also known as the mainnet. They have one main goal, which is to solve the issue of scalability that is holding back the widespread adoption of blockchain technology.

Along with other solutions like rollups and plasma, sidechains aim to make transactions faster and more efficient while also improving the overall security of the mainnet. However, it’s important to note that sidechains differ from other Layer 2 solutions.

They have unique security and consensus protocols, such as Proof-of-Stake, allowing them to offer additional features and capabilities.

Key Takeaways

• Sidechains are independent blockchains that are created from the main blockchain.
• They are typically linked to the main blockchain using a two-way peg system.
• Sidechains offer a promising approach to solving the issue of blockchain scalability.
• Polygon, a layer 2 solution developed by Ethereum, is a network that leverages the concept of sidechains.

How do sidechains work?

To move coins or other digital assets onto a sidechain, the user sends them to a specific output address, where they become locked and can’t be spent elsewhere. Once the transaction is complete, a confirmation is sent across both the main chain and the sidechain, followed by a waiting period for added security.

Once this waiting period is over, the coins or assets are fully transferred to the sidechain, allowing users to move them around freely on the new network. Sidechains can be designed with various functions in mind, depending on the specific use case.

For example, both Liquid and Rootstock are Bitcoin sidechains but function differently. Rootstock, in particular, is designed specifically for running smart contracts more efficiently.

Two key components are used to facilitate communication between the main chain and the sidechains: two-way pegs and federations.

Two-way peg

Sidechains were created to make it easier to transfer digital assets between different blockchains without having to rely on any third-party intermediaries. Ideally, these transfers should be free of any counterparty risks, which means that no one should be able to prevent the transfer of an asset from happening.

A two-way peg mechanism is used to enable this kind of transfer between blockchains. Think of it as a two-way tunnel, with assets moving back and forth in both directions.

According to the sidechain white paper, a two-way peg is “the mechanism by which coins are transferred between sidechains[…]. A pegged sidechain is one whose assets can be imported from and returned to other chains”.

A two-way peg allows digital assets like Bitcoin to be easily transferred between the main blockchain and the new sidechain.

It’s worth noting that the actual transfer of digital assets doesn’t take place. Instead, the assets are locked on the main blockchain while an equivalent amount is unlocked on the sidechain.

This means that any two-way pegged operation has to assume that the parties involved, known as “validators,” are acting honestly. If not, there’s a risk of fraudulent transfers or legitimate transfers being stopped.

What role do federations have in sidechains?

A third party is needed to secure transactions between the main blockchain and the sidechain. This middle point is overseen by federations, which can be either a group of people or a code-based system.

Federations are responsible for checking the locking and unlocking of digital assets, as mentioned earlier. They ensure that the assets locked on the main blockchain match the assets unlocked on the sidechain, thereby ensuring that the value of the sidechain never exceeds that of the main blockchain.

Advantages of Sidechain

There are multiple benefits of a network gaon by using sidechain in upscaling its transaction process and time frame. But here are our top 4 reasons why sidechains are a must use.

Scalability

Sidechains can solve blockchain’s scalability issues, as they can handle more transactions without slowing down or risking network failure. This means the network can process more data and reduce transaction costs. This helps blockchain technology evolve and become more widely adopted.

Easy Upgrades

Upgrading and introducing new ideas in a decentralized blockchain can be challenging. Sidechains provide a solution by allowing incoming upgrades to be tested on a different chain. This act results in a more seamless process to achieving consensus and increased efficiency, making the system more reliable.

Flexibility

Sidechains allow for interaction between separate cryptocurrencies within the blockchain system. This means that independent sidechains can be created for different cryptocurrencies and connected to the mainchain, enabling exchanges.

Functionality

Sidechains can add functionality to the mainchain by utilizing smart contracts and enabling the creation of dApps for blockchains that cannot support them, such as Bitcoin.

Risks of using sidechains

While there are benefits gained from using sidechains in your network, there are also risks you must be aware of. There are two major risks you must prepare for and they are security limitations and less decentralization.

Security Limitations

One of the main drawbacks of sidechains is that they rely on their validators for security instead of being secured by Layer 1. Attracting a sufficient number of interested validators can be challenging for networks, especially for chains that lack native coins to encourage users to become a part of their network.

As a result, smaller chains are more vulnerable to potential attacks, which may raise concerns regarding the system’s overall security.

Less Decentralization

The truth is that sidechains are generally more centralized than parent chains. When you compare them to main blockchains, their dependence is on a small number of miners, which can result in less decentralized transaction processing.

This raises questions about how well sidechains are compatible with the decentralized nature of blockchain technology.

The Importance of a Blockchain Sidechain

Sidechains allow developers and blockchain users to test features and explore new use cases that may not be available on the main chain. Additionally, they can help make transactions faster and reduce transaction costs.

This makes sidechains an essential tool for increasing blockchain accessibility, allowing users to utilize their cryptocurrency assets in various ways. For instance, with Bitcoin transactions, there is no need to spend excessive amounts on fees or wait for hours to validate a transaction when using a sidechain.

Sidechain Blockchain Platforms

RSK (RootStock)

RSK (RootStock) is a Bitcoin sidechain that allows for the creation of decentralized applications with which users can interact. Smart contracts are essential to decentralized applications widely used on blockchain networks such as Ethereum.

However, smart contract technology is not natively integrated into the Bitcoin mainchain. With RootStock, Bitcoin holders can lock up their assets and turn them into Smart Bitcoin (SBTC) to utilize the network’s smart contracts.

Users do not need to exchange their Bitcoin for other assets to access this capability, thanks to RootStock’s Bitcoin sidechain, which facilitates the implementation of smart contracts via a sidechain. RSK smart contracts offer a dependable setting for two parties to exchange value since they are systematic, safe, and fully decentralized.

Users of RootStock may also lend and borrow Bitcoin, doing away with the necessity for conventional banks. On the Bitcoin they have loaned out, lenders may earn interest, and borrowers can have more flexibility over the interest charges.

In addition, RootStock will expand its infrastructure via RIFOS. This platform enables users to manage their identity, communications, file storage, and more, all in one decentralized space. RIFOS, combined with smart contract technology, will support blockchain-based decentralized internet usage, creating a new era of accessibility and security.

Ardor’s Blockchain

Being a parent-to-child chain design, the blockchain network of Ardor is special. The mainchain of Ardor, which houses all transactions, security procedures, and other data, is the parent blockchain.

Developers can design separate child chains connected to the main chain, each with a distinct coin and use case listed for trade on a single exchange focused on Ardor. The goal is to establish a network of compatible blockchain systems, increasing their adaptability and usage.

By maintaining safety and transaction verification on the mainchain rather than filling up a secondary chain, Ardor speeds up the construction of blockchains. Because the whole network works on the “Proof of Stake” mechanism, anybody may take part in cybersecurity and governance without needing expensive equipment.

Furthermore, the network’s child chain technology enables anybody to use their own blockchain without requiring programming or development skills, enhancing blockchain usability for people everywhere.

Finally, Ardor’s ARDR token is used for governance, while each child chain has its own cryptocurrency for interaction. The platform’s unique architecture, streamlined creation process, and accessibility make it a promising player in blockchain technology.

Liquid

Liquid is a decentralized application network that provides various services, such as lending platforms and exchanges. LBTC is the currency used in the project, backed 1:1 by Bitcoin.

By converting their BTC to LBTC, users can acquire other cryptocurrencies on the Liquid platform, lend them out for interest, or even issue new stablecoins and different asset types. The platform offers Bitcoin holders a variety of use cases not available on the Bitcoin mainchain, similar to RootStock.

Liquid’s governance model, or “federation,” is one of its standout features. The Liquid Federation has three tiers – functionaries, members, and full nodes.

Functionaries are specialists in approving transactions between the Liquid Network and Bitcoin. Participants use LBTC to cast votes on network suggestions. The most devoted Liquid users, known as Full Nodes, double-check Functionaries’ activities to ensure that payments are verified correctly and that no malicious parties are interfering with the network.

While the previous two layers are necessary for Liquid to operate, Complete Nodes act as the system’s last line of defense.

The potential of sidechains

Layer 2 scaling solutions can remedy the slow transaction times and high fees plaguing cryptocurrencies. One of the most promising Layer 2 scaling solutions is the Lightning Network, which works by opening up payment channels between users.

Instead of every transaction being recorded on the blockchain, multiple transactions can be made off-chain, and only the final balance is recorded. The Lightning Network has the potential to reduce transaction times and fees significantly.

It also allows for micropayments, which are not feasible on the main blockchain due to the small size of the transactions.

Shaping the future of blockchain

In conclusion, sidechains are one of the Layer 2 scaling solutions that are undoubtedly here to stay. The scalability trilemma is among the most significant concerns regarding the usability of blockchain around the world.

With the creation of sidechains and other similar alternatives, the adoption of decentralized blockchain technology has become easier than ever.