What Is a Sidechain?
A sidechain is an independent blockchain that runs parallel to the main blockchain, also known as the mainnet. Its primary goal is to address the scalability limitations of the mainnet by offloading certain operations and transactions to a secondary chain.
While sidechains maintain a connection to the parent blockchain, they operate with their own consensus mechanisms, rules, and governance systems.
Unlike layer 2 scaling solutions, sidechains are responsible for their security and don’t inherit the security properties of the main chain.
History of Sidechains
Adam Back, the mastermind behind HashCash and current CEO of Blockstream, first proposed the idea of sidechains in a whitepaper in 2014. A number of prominent crypto veterans, including Matt Corallo, Luke Dashjr, and Mark Friedenbach, co-founder of Blockstream, were also involved in the project.
These individuals had already integrated HashCash’s proof-of-work (PoW) consensus mechanism into Bitcoin (BTC), enabling competitive BTC mining. However, they recognized the need for further enhancements if Bitcoin aimed to cater to a global audience.
The sidechain white paper acknowledged the existing trade-offs between scalability and decentralization within the Bitcoin infrastructure. Additionally, it raised concerns surrounding Bitcoin’s privacy and susceptibility to censorship.
“We propose a new technology, pegged sidechains, which enables bitcoins and other ledger assets to be transferred between multiple blockchains. This gives users access to new and innovative cryptocurrency systems using the assets they already own.”
How Do Sidechains Work?
Sidechains can operate in a number of ways. However, at the core is the ability to interchange assets between chains using a two-way peg mechanism. This mechanism ensures that assets are locked in the main chain when transferred to the sidechain and can be unlocked and transferred back to the main chain when needed.
According to the whitepaper:
“Two-way peg refers to the mechanism by which coins are transferred between sidechains and back at a fixed or otherwise deterministic exchange rate.”
Sidechains achieve this through validating nodes, which verify and process transactions, produce blocks, and store blockchain data. These nodes are responsible for ensuring the security and integrity of the sidechain, as well as the pegging process.
Pros and Cons of Sidechains
Sidechains come with a number of benefits, including:
- Scalability: Sidechains aim to address the scalability issues of the main blockchains by processing a subset of transactions independently. This allows for faster transaction times and increased throughput.
- Customizable Functionality: Sidechains offer the flexibility for developers to experiment and implement custom features, smart contracts, and consensus mechanisms specific to their use cases. This enables tailored solutions without affecting the main blockchain’s stability and consensus rules.
- Interoperability: Sidechains maintain a connection to the main blockchain, facilitating the transfer of assets between chains. This interoperability opens up opportunities for cross-chain interactions, enabling seamless integration with decentralized applications (dApps) and other blockchain networks.
- Enhanced Privacy: Sidechains can implement specific privacy features, such as zero-knowledge proofs or ring signatures, to enhance the confidentiality of transactions and user data.
Despite their benefits, sidechains also come with certain drawbacks:
- Security Risks: Sidechains do not inherit the security features of their mainnets, meaning they are responsible for their own security. This suggests that sidechains won’t be able to leverage the security strength of popular blockchains like Bitcoin and Ethereum.
- Centralization Concerns: Depending on the chosen consensus mechanism, sidechains may introduce a level of centralization through the reliance on trusted validators.
- Trust Requirements: Sidechains require users to trust the validators responsible for the pegging process. While the mechanism is designed to be secure, reliance on trusted entities interferes with the crypto core ethos of permissionless and trustless.
Sidechain vs. Layer-2 Blockchain: What’s the Difference?
While sidechains and layer 2 blockchains both aim to address scalability, they have different approaches.
Address scalability by running parallel chains
Address scalability with off-chain layers
Relationship to the Main Chain
Run parallel and independent of the main blockchain
Built on top of the main blockchain
Usually have their own consensus mechanisms
Leverage the main chain’s consensus mechanism
Process transactions on their separate chains
Process transactions off-chain
May have varying transaction speeds
Generally offer faster transactions
Costs can vary based on the sidechain design
Generally offer cheaper transactions
Security depends on the sidechain’s consensus
Leverage the main chain’s security
Liquid Network, RootStock (RSK)
Lightning Network, Plasma
Prominent Examples of Sidechains
Sidechains have found increasing popularity within the crypto industry, with major blockchains like Bitcoin and Ethereum depending on them to help scale their blockchains. Here are some prominent examples of sidechains:
- RSK (Rootstock): RSK is a sidechain built on the Bitcoin network that enables the execution of smart contracts. It uses merge mining, where miners can simultaneously mine Bitcoin and RSK blocks, to enhance security and interoperability.
- Liquid: Liquid is a sidechain developed by Blockstream for Bitcoin that focuses on fast and confidential transactions. It caters to cryptocurrency exchanges and institutions, providing faster settlement times and the ability to issue and transact with digital assets.
Sidechains have emerged as a promising solution to tackle the scalability challenges faced by blockchain networks. By offloading certain operations to independent chains, sidechains offer increased throughput, customizable functionality, and interoperability with the main blockchain.
While there are certain drawbacks to the technology, sidechains have the potential to expand the scope, scale, and dynamics of blockchain technology.