By
Grace
July 19, 2022
4 Min Read
Sidechains are independent blockchains that operate independently from a parent blockchain, also called a mainnet. A sidechain is a separate blockchain connected to the main blockchain via a two-way bridge, allowing asset transfers and interaction while maintaining its own consensus and security. This structure plays a crucial role in the broader blockchain ecosystem by enabling modularity and flexibility.
Alongside other Layer 2 scalability solutions like rollups and Plasma, sidechains require infrastructure to function and are a key solution to blockchain scalability. They attempt to enhance transaction efficiency, speed, and boost the mainnet’s security. Although they are often grouped with other Layer 2 solutions, sidechains actually differ from the rest. They rely on independent security and consensus protocols, like Proof-of-Stake, empowering these independent blockchains to provide more functionalities.
Think of sidechains that work as fast lanes on the road. They enable digital assets and transactions to be passed on from blockchain’s mainnet to a separate chain of blocks, where data can be processed more quickly and more transactions can be verified without causing network congestion. A sidechain is a secondary blockchain that enables sidechain operations, such as transferring assets between the main blockchain and the sidechain, supporting scalability and experimentation.
Because they use their own consensus mechanism, sidechains can operate independently from the mainnet and may utilize different consensus mechanisms to enhance security, performance, or functionality. Importantly, this sovereignty also means that if security breaches occur on a sidechain, they will not compromise mainnet security.
Communication between these chains and the mainchain is facilitated via two key components - two-way pegs and federations.
Assets are securely transferred between the main blockchain and the sidechain using a two way peg. Two-way pegs facilitate the transfer of digital assets or tokens between sidechains and the main blockchain.
The two way peg enables a seamless transfer of an equivalent amount of assets by locking the original asset on the mainnet. A smart contract manages this process, sending the locked asset to an output address, which triggers the creation of an equivalent amount of tokens on the sidechain. This ensures that assets are securely transferred and prevents asset mismatches. When moving assets back, the smart contract unlocks the equivalent amount on the main chain by releasing them from the output address, maintaining the integrity and interoperability of both chains.
To guarantee the integrity of transactions between the mainnet and the sidechain, a middle party is required. This intermediate point is managed by federations, which can be both code-based or a group of individuals. Federations are in charge of verifying the locking and releasing processes mentioned earlier. They inspect whether the locked-up coins match the released coins, ensuring that the sidechain's value never exceeds that of the mainchain.
Although initially created as a scalability solution, these independent chains offer a number of different advantages that help improve the overall efficiency of blockchain and enable the development of specific applications tailored to different use cases within the blockchain ecosystem.
Perhaps one of the greatest strengths of sidechains is their ability to increase transaction speed and reduce transaction costs, effectively solving blockchain’s scalability problems. By enabling faster and cheaper transactions across blockchain networks, sidechains allow more data to be processed without any risks of network slowdowns or failures. They also provide cheaper transactions, further enhancing cost efficiency. This facilitates the evolution of blockchain technology as a prevailing solution for the future.
Because blockchain is decentralized, oftentimes, reaching a decision about upgrades and new ideas is a challenge. Sidechains enable new updates to be tested separately from the mainchain, leading to more efficiency, faster consensus, and more reliable evolution of the technology as a whole.
Another important benefit that sidechains bring to the table is that they enable the creation of decentralized applications and facilitate interactions between different cryptocurrencies in the blockchain system. Independent sidechains could be created for different cryptocurrencies, supporting the transfer and exchange of cryptocurrency assets, which could be connected to the mainchain, permitting exchanges.
Sidechains can bring smart bitcoin functionality to the bitcoin network by enabling smart contracts on the bitcoin blockchain. For example, they can utilize smart contracts and facilitate the creation of different decentralized applications (dApps) for blockchains that are otherwise unable to, like Bitcoin.
As beneficial as sidechains may be for blockchain technology, they do come with several risks that should be noted. The proliferation of multiple sidechains and sidechain technology can lead to fragmentation within the blockchain ecosystem, reducing interoperability and collaboration, and may also increase the risk of fraudulent transfers due to potential vulnerabilities or validator dishonesty.
Sidechains are not secured by Layer 1 and instead depend on their own validators for security. Attracting a large number of interested validators can be difficult, especially for chains that do not native tokens that can serve as incentives. As smaller chains, they are more vulnerable to potential attacks.
Sidechains are considered more centralized than parent chains. Compared to main blockchains, they rely on a smaller number of miners, making transaction processing less decentralized. This raises questions regarding compatibility with blockchain's decentralized nature.
Sidechains are a rather new solution that is still undergoing experiments. There are a few projects that have already gained popularity as solutions with game-changing capabilities.
Polygon, initially introduced as the Matic Network, connects its sidechains to the ethereum network and uses a protocol designed to provide faster and cheaper transactions. It aims to tackle Ethereum’s scalability challenge via Layer 2 solutions and sidechains, providing a connection between blockchains. The solution also features compatibility with the Ethereum Virtual Machine. You can read more about Polygon in our detailed overview of the platform.
Skale is a Layer 2 sidechain network that runs on Ethereum that facilitates dApp development in an affordable, fast, and efficient environment. The blockchain network supports a wide range of blockchains and sidechains, unlocking Ethereum's potential for users via SKALE chains.
SmartBCH is among the first types of sidechains designed for Bitcoin Cash and is compatible with the EVM and Web3. It was created with the purpose of supporting DeFi application migrations into the Bitcoin Cash system.
In conclusion, sidechains are one of the Layer 2 scaling solutions that are undoubtedly here to stay. The scalability trilemma is among the biggest concerns when it comes to the usability of blockchain around the world. With the creation of sidechains and other similar alternatives, the adoption of decentralized blockchain technology becomes easier than ever.
