Sidechain: Definition and examples

The cryptocurrency industry has come a long way since Bitcoin made its public debut back in 2009. And as it has evolved and grown in popularity, blockchain technology has been forced to adapt and improve in order to keep up with increased demand and new features. That’s one of the reasons why sidechains have become so critical.

Sidechains allow developers to build secondary chains that run alongside an original blockchain, such as those offered by Bitcoin and Ethereum. They can not only improve speed and efficiency, but they can also bring new features that otherwise wouldn’t be possible. In this AAG Academy guide, we’ll look at what sidechains do and why they’re so important.

What are sidechains in cryptocurrency?

Most cryptocurrency enthusiasts have heard of blockchains — the backbone of the entire cryptocurrency industry — and have a basic understanding of how they work, but did you know that they’re not the only type of “chain” in use today? In recent years, sidechains have become increasingly important to many networks.

Sidechains are separate, secondary (Layer 2) blockchain networks that connect to a parent blockchain, otherwise known as a “mainnet.” They are typically used to make existing networks more scalable when they become too popular to handle so many users, but they can also be implemented to improve things like privacy and security.

Because sidechains operate independently, they can have their own consensus mechanisms, designs, and project roadmaps. That means it’s possible to have a sidechain that uses proof-of-work (PoW) working adjacent to a mainnet that uses proof-of-stake (PoS) — and vice-versa. This can give networks the best of both worlds when it comes to consensus.

Sidechains were first devised by Adam Back, the creator of HashCash and current CEO of Blockstream, who wrote about the concept in a 2014 academic paper. A number of Bitcoin engineers were also involved in the original design.

How do sidechains work?

One of the simplest ways to understand how all this works is to think of parent blockchains, or mainnets, as a major highway. Sidechains are roads with their own laws and speed limits that connect to that highway. There can be multiple roads, each of which might take you to different places (or different features), but only one highway linking everything together.

One of the key components of a sidechain is a feature called two-way pegs, which you can think of as two-way roads. These allow the sidechain to communicate with the mainnet for the transfer of coins, tokens, and other digital assets. Two-way pegs not only ensure compatibility between the multiple chains, but they also help prevent fraudulent transfers.

When transfers are made between a sidechain and a mainnet, the assets don’t actually move. Instead, they are locked on the mainnet and unlocked on the sidechain (or vice-versa), preventing them from being used more than once. To facilitate all of this and block malicious activity, we rely on smart contracts — another key component of sidechains.

Smart contracts are used to ensure that when a transaction takes place, the mainnet is notified and happy with it. It can then be verified and funds can be released from the sender’s wallet.

What are the benefits of sidechains?

By now you’ve probably already recognized a number of benefits that sidechains can offer. Let’s look at some of those in more detail:

Scalability
As we touched upon above, one of the biggest benefits of sidechains is scalability. When mainnets start to get bogged down by too many users, a sidechain can help speed things up, especially when it uses an efficient consensus method that can process transactions more quickly — and therefore reduce transaction fees for users.

Security
In addition, sidechains boost security by providing the mainnet with an additional layer of protection. Sidechains, although they can communicate with the mainnet, operate entirely independently, so if they are compromised in any way, it’s only the sidechain that’s affected. Sidechains can also benefit from additional security features that the mainnet may not have.

Flexibility
Another big benefit of sidechains is that they can be used to test and add new features to a network. Making changes of any kind to a mainnet is incredibly risky because if anything goes wrong or bugs are introduced, it can disrupt the entire network. If the same thing happens when making changes to a sidechain, the mainnet continues to operate unaffected.

What are the disadvantages of sidechains?

Although sidechains help solve a lot of the problems that blockchains have suffered for many years, particularly as the cryptocurrency industry has evolved and grown in popularity, they do have some downsides we should be aware of. These include:

Added complexity
Not only do sidechains make the whole concept of blockchains even more complex than they already were, but they must be maintained independently, which can mean a lot of extra work.

Weaker security
It can also mean that sidechains end up being less robust or less secure than the original mainnet, which could make them more vulnerable to abuse and attack. Sidechains are not protected by Layer 1 security like mainnet blockchains; they instead rely on their own validators, and they tend to have a lot fewer than an original mainnet.

Less decentralization
A fewer number of validators also means sidechains are less decentralized than mainnets.

What are some examples of sidechains?

One of the biggest examples of a sidechain is Polygon, which offers scaling solutions for the Ethereum blockchain. It helps to ensure that the network can cope when there is an increase in user demand, while ensuring a snappy experience that doesn’t compromise on security.

Skale is another sidechain that operates alongside Ethereum. It helps developers deploy their own EVM (Ethereum Virtual Machine) in minutes without sacrificing security or decentralization. It uses the PoS consensus mechanism and on-chain file storage.

On the Bitcoin network, Liquid Network is one of the best-known sidechains. It helps speed up transaction times, without compromising privacy or security, by reducing the time it takes to process new blocks. Liquid Network can confirm new blocks in around two minutes, whereas on the Bitcoin network itself, the process takes around 10 minutes.

References

• An introduction to sidechains
• What are sidechains
• Sidechains blockchain scalability
• Sidechain
• A beginners guide to the liquid network