Sidechains: Everything to Know
By Beluga Research July 10, 2023
- A sidechain is a separate blockchain that is connected to the main blockchain.
- This allows for new functionalities, features and experiments that may not be available on the main chain
- A sidechain primarily allows developers to experiment with new ideas and features
- This is because a sidechain will not disrupt the activities of a cryptocurrency network's main blockchain
A sidechain offers a way for software developers to experiment with a blockchain without disrupting the main chain. A sidechain is a separate blockchain connected to the main chain. The concept of sidechains has been around since 2014, but only recently gained significant attention and interest within the blockchain community.
A Brief History
In 2014, a group of researchers led by Adam Back introduced the concept of sidechains in a paper. The paper outlined the basic concept of sidechains and how they could be used to extend functionality of the Bitcoin blockchain. The idea was quickly embraced by the blockchain community. Several projects were launched to explore the concept.
One of the first sidechain projects to gain significant attention was the Liquid Network, launched in 2018 by Blockstream. The Liquid Network is a sidechain designed to facilitate fast and secure transactions between exchanges and other financial institutions. The Liquid Network has gained significant adoption in the cryptocurrency industry. It is now used by several major exchanges.
What is a Sidechain?
A sidechain is a separate blockchain connected to a main blockchain. This connection is achieved through something called a two-way peg. Such a peg allows the transfer of assets between the two chains. The two-way peg ensures that the assets on the sidechain are backed by assets on the main chain. This ensures the value and security of assets on the sidechain.
Sidechains can be designed to have their own unique features and functionality. They can also be used to experiment with new ideas and concepts without disrupting the main blockchain. For example, a sidechain can be designed to facilitate fast and cheap transactions. It can also be used to offer privacy and anonymity features unavailable on the main chain.
Sidechains can be used to create interoperability between different blockchains. For example, a sidechain can be created to connect to the Bitcoin and Ethereum blockchains. The sidechain would allow for the transfer of assets between the two chains.
- Transfer of assets between the main chain and the sidechain. Tokens or coins can be moved from the main chain to the sidechain. Then they can be used for specific purposes. The tokens or coins can be moved back to the main chain whenever they are needed there.
- Offer new features and functionalities not possible on the main blockchain. A sidechain can be designed to handle a specific type of transaction, like micropayments or smart contracts. Transactions on the sidechain will not affect the main blockchain.
- Reduce congestion on the main chain. Conducting transactions on a sidechain frees up space to conduct transactions on the main chain.
- Improve overall scalability. Conducting transactions on the sidechain allows more scaling on the sidechain and the main chain.
Sidechains are separate chains of blocks that run alongside the main blockchain. They are attached to the main chain through a two-way peg. A blockchain is a decentralized ledger that records transactions in a secure and transparent manner. Each block in the chain contains a set of transactions. Once a block is added to the chain, it cannot be altered. A sidechain can offer different features than the main chain:
- Can be customized to meet specific needs. Developers can tailor a sidechain designed for a particular use, like gaming or supply chain management.
- Have different consensus mechanisms than the main blockchain. Sidechains can be more efficient and cost-effective than the main chain. This is because they may use different algorithms and protocols to validate transactions.
- Facilitate interoperability between different blockchains. Since sidechains allow the transfer of assets between chains, they make it possible for different blockchains to work together seamlessly. This can help to promote the adoption of blockchain technology. The transfer of assets can also create a more interconnected ecosystem.
- Scalability. Sidechains provide a way to increase the transaction throughput of a blockchain network. They allow certain transactions to be processed off-chain. This can help reduce network congestion. The off-chain processing ensures that the main chain remains fast and responsive.
- Interoperability. Sidechains enable the transfer of assets between different blockchain networks. This benefits users by creating a more connected ecosystem of blockchain applications. The transfer of assets also helps reduce the need for centralized exchanges. Users can exchange assets directly between different chains.
- Customizability. Sidechains can be customized to meet specific business or application requirements. For example, a sidechain can be designed to process only a specific type of transaction. Such flexibility allows developers to create blockchain solutions that are tailored to their specific needs.
- Security. Sidechains can be designed to be highly secure. Each can have distinct consensus mechanisms and validation rules. This helps prevent attacks on the main blockchain network. Malicious activity on a sidechain will not affect the main chain.
- Privacy. Sidechains can be designed to provide increased privacy and anonymity for certain types of transactions. For example, a sidechain can be used to process confidential transactions that are not visible on the main blockchain.
- Centralization. Sidechains introduce a degree of centralization into a blockchain ecosystem. They require a certain level of trust between the main chain and the sidechain. This may be difficult to achieve in a fully decentralized system.
- Security. While sidechains can be designed to be highly secure, they may also introduce new security risks. For example, a sidechain may be vulnerable to attacks if it is not properly secured or its consensus mechanism is compromised.
- Complexity. Sidechains can be complex to design and implement. They require a high level of technical expertise. This can make it difficult for smaller blockchain projects or startups to realize any advantage from them.
- Interoperability. While sidechains can provide interoperability between different blockchain networks, they also introduce new interoperability challenges. For example, different sidechains may use different consensus mechanisms or validation rules. This can make it difficult to transfer assets between sidechains.