Cryptocurrencies such as Bitcoin have rewritten the rules for accessing financial services alongside exercising control and ownership of your assets. Over the course of more than a decade, since the first cryptocurrency, i.e., Bitcoin, arrived in the world, many new cryptocurrencies have emerged with distinct utilities. In addition, the use of blockchain technology beyond cryptocurrencies, such as in decentralized apps and smart contracts, has marked a profound growth in traffic on blockchain networks. The concept of sidechain blockchain has evolved as a prominent solution to the scalability issue in popular blockchain networks. Scalability can play a vital role in encouraging the adoption of cryptocurrencies and the development of dApps alongside other blockchain-based solutions. The following post serves as an introductory guide to sidechains and their significance in the crypto and blockchain landscape.
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Origins of Sidechains
The foremost aspect in any account of sidechains explained clearly would focus on the blockchain trilemma revolving around decentralization, security, and scalability. As a matter of fact, it is one of the biggest setbacks for the mainstream adoption of blockchain technology. How does the trilemma cause such troubles?
Apparently, blockchain-based networks, systems, or solutions have to compromise on one of the factors to achieve the other two. For example, you could not have scalability if you want decentralization as well as security. No one would like to compromise on decentralization and security, as they are the basic traits of blockchain technology. On the other hand, scalability has been on the back seat in the blockchain landscape for quite a long. As users throng to different blockchain networks for building dApps, scalability has become an inevitable requirement.
Interestingly, the answer to scalability issues in the form of Layer 2 scalability solutions has been a reassuring factor. Some of the layer 2 solutions, such as rollups and plasma, have successfully offered viable solutions for scalability. However, sidechains are different from the other layer 2 scalability solutions, as they depend on independent consensus and security protocols. As a result, they have the capabilities to offer additional functionalities.
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Creators of Sidechain
The background for developing sidechains shows their significance in the world of crypto and blockchain. Who created the concept of sidechain in crypto, and how did they come up with the design? The first-ever instance of the concept of sidechains was presented by Adam Back in October 2014. Adam is the creator of HashCash and works as the existing CEO of Blockstream. In addition, some of the most renowned Bitcoin experts were also on board the project.
Notable names among the developers of the sidechain concept include co-founder of Blockstream, Mark Friedenbach, and Bitcoin experts Luke Dashir and Matt Corallo. Interestingly, many of the authors associated with the academic paper highlighting the concept of sidechains had also contributed to the development of the peer-to-peer electronic cash system, i.e., Bitcoin. For example, some of the authors had worked on integrating the Proof of Work mechanism of HashCash into the Bitcoin blockchain.
With the concept of sidechain blockchain, the authors intended to capitalize on the possibilities for improvement in Bitcoin to enable global appeal. The whitepaper for the sidechain concept highlighted the views of authors about consistent tradeoffs between decentralization and scalability. At the same time, the academic paper also emphasized the concerns regarding privacy and censorship with Bitcoin. Therefore, the need for new technologies to improve the cryptographic security of Bitcoin became clearly evident in encouraging mainstream Bitcoin adoption by more users.
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Definition of a Sidechain
The authors of the academic paper outlining the concept of sidechains established strong reasons for building sidechains. You can find answers to “what are the sidechains?” by reflecting on the vision of authors who had proposed sidechains. According to the original proponents of sidechain technology, the new pegged sidechains would support the easier transfer of Bitcoin alongside other distributed ledger assets across different blockchains. As a result, users could access many new and advanced crypto and blockchain systems with the assets under their ownership.
The proposal for sidechains shows what they can do. How are the sidechains designed? The definition of sidechains paints them as separate blockchain networks, which can help in connecting to another blockchain through a two-way peg. Any sidechain blockchain example, such as Polygon blockchain, would show that they work as secondary blockchains. Interestingly, sidechains are unique and feature their own consensus protocols. Therefore, they could help the parent blockchain network or mainnet in ensuring better security and privacy, alongside reducing the need for additional trust in maintaining another secondary network.
Another prominent highlight in the definition of sidechains explained clearly would focus on the ability to facilitate seamless asset exchange. Sidechains can enable an uninterrupted exchange of assets with the parent blockchain, with the assurance of security.
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Working of Sidechains
The essential highlight in an introduction to sidechains would obviously focus on their working. You can draw a simple analogy to fast lanes running parallel to highways. Imagine the blockchain mainnet as a busy highway congested with traffic, and you have to pass your transaction through the traffic. In this case, you can try moving the transaction via a parallel road to the highway. The same is applicable in the case of sidechains and blockchain mainnet.
The simple explanation for “How does sidechain work in blockchain?” helps in identifying how the seamless exchange of assets comes into play. By enabling the transfer of digital assets and transactions to a separate chain, sidechains could enable faster processing of data. As a result, they can easily facilitate transaction verification and finality without any problems of network congestion. Since sidechains have their own consensus mechanisms and validators, they are completely independent of the mainnet. Therefore, breaches in the sidechain could not affect mainnet security.
Components of Sidechains
The basic description of how sidechains work with blockchain offers a valid impression of their usability. Now, you must know about the components in sidechains that enable their effective operations. You must be wondering about the mechanism for communication between sidechains and the parent blockchain. Do sidechains use some sort of bridge? No, sidechains communicate with the blockchain mainnet by using two-way pegs and smart contracts. Let us dive deeper into the functionalities of the components in sidechains.
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How Is Two-Way Peg Used in Sidechains?
The explanation for sidechain crypto usage would largely emphasize the seamless transfer of assets among blockchain networks, irrespective of ownership. Now, the sidechains must ensure the exchange of digital assets with the parent blockchain without counterparty risks. Any secondary actor should not have the authority to stop the transaction. This is where you would come across the need for a two-way peg between the sidechain and the blockchain mainnet. The two-way peg is similar to a two-way tunnel, where vehicles can drive in both directions.
The sidechain whitepaper defines a two-way peg as the mechanism for transferring crypto assets between sidechains. In other words, a sidechain must be ‘pegged’ to enable the import of assets from other chains and return them. Simply put, the two-way peg is essential for facilitating Bitcoin transfer to and fro between the sidechain and the Bitcoin mainnet. However, the supposed ‘transfer’ of assets with a sidechain never actually happens. On the contrary, the assets are locked on the mainnet while unlocking the equivalent amount on the sidechain.
The locking mechanism in a two-way peg is a notable highlight in any sidechain blockchain example, as it prevents the spending of assets before achieving transaction finality. After successful verification of the assets on the sidechain, users can spend or utilize them through different releasing mechanisms. In addition, a two-way peg could also ensure interoperability.
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What Is The Use of Smart Contracts in Sidechains?
The easy transfer of assets between sidechains and the mainnet depends on the off-chain process or transactions happening outside the mainnet. The explanation of the use of two-way pegs in sidechains shows that the transfer of assets does not actually happen. With an imaginary transfer, the assets are locked and released on either end after successful validation of the assets or transactions. The working of sidechains explained how smart contracts could come into play in this scenario. Smart contracts play a crucial role in facilitating the validation required for moving assets to and from between sidechains and the mainnet.
Smart contracts are essential for avoiding the concerns of foul play. They work on ensuring honest behavior from validators on the mainnet and the sidechain during the confirmation of cross-chain transactions. Upon successful verification of a transaction, the smart contract would inform the parent blockchain about the event. Subsequently, the off-chain process relays the transaction details to the sidechain smart contract, thereby verifying the transaction. After completing the procedure, the assets can be unlocked on the sidechain, thereby ensuring easy movement of assets between blockchains.
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Examples of Sidechain Blockchain
The next crucial highlight in a guide on sidechains would refer to real examples. You can learn more about “What are the sidechains?” by diving deeper into the technicalities of actual sidechains. The prominent examples of sidechains include the Liquid Network and RootStock or RSK, which work as Bitcoin’s sidechains. It is important to note that these sidechains support activities with the use of Bitcoin only.
The Liquid Network
The Liquid Network has been designed as an open-source sidechain over the Bitcoin parent blockchain. It leverages the prominent features of sidechains for reducing the block discovery time to one minute, in comparison to the ten minutes of the Bitcoin mainnet. The Liquid Network also helps users in private transactions of digital assets by masking the asset type and amount.
RSK is another sidechain blockchain example focused on operating smart contracts. When you are using RSK, it locks Bitcoin on the mainnet and would be released in the form of smart Bitcoin or SBTC, the native currency of the RSK sidechain. The command over smart contract usage in RSK enables users to avoid the conversion of their Bitcoin into other assets for using smart contracts. As a result, it can facilitate the interoperability of users’ Bitcoin on other blockchain networks.
Another prominent example of a sidechain in crypto world is Polygon. Initially known as the Matic Network, Polygon has emerged as one of the popular layer 2 scalability solutions. It offers an effective solution for resolving the scalability challenge and enabling interoperability between different blockchain networks. Polygon also features compatibility with EVM or Ethereum Virtual Machine, thereby validating its potential for the expanding dApps ecosystem.
Some of the other notable examples of sidechains include Skale and SmartBCH.
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Benefits and Setbacks of Sidechains
The description of sidechains has been frequently associated with the advantage of scalability. In addition, they can also offer many other advantages for improving the efficiency of blockchain solutions. At the same time, you must be aware of the potential risks associated with sidechains before you use them.
One of the foremost aspects in responses to “How does sidechain work in blockchain?” would refer to scalability. Sidechains can increase the transaction capacity, thereby enabling capabilities to process more data without risks of network downtime or failure. At the same time, sidechains also reduce the costs of transactions and could open up blockchains to more users in the future. Furthermore, sidechains can also enable easier addition of upgrades alongside interoperability of assets across multiple blockchains. In addition, they can also help in creating additional functionalities for the mainnet.
Sidechains appear as revolutionary interventions in the blockchain landscape with many promising benefits. However, you should also notice the risks of limited security due to the lack of incentives for validators. On top of it, sidechains depend on a smaller group of miners and introduce more centralization in comparison to the mainnet.
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Sidechains could revolutionize the use of blockchain by offering the potential for expanding the blockchain ecosystem. Mainstream adoption of cryptocurrencies and blockchain technology depends on the user experience. The sidechain blockchain equation with the seamless transfer of assets offers improvements in efficiency and transaction finality.
With the help of two-way pegs and smart contracts, sidechains could ensure the ideal solution for scalability problems with blockchain. Most important of all, cross-chain interoperability through sidechains could also enable seamless access to different blockchain-based projects. Learn more about the significance of sidechains and their role in the future of blockchain.
*Disclaimer: The article should not be taken as, and is not intended to provide any investment advice. Claims made in this article do not constitute investment advice and should not be taken as such. 101 Blockchains shall not be responsible for any loss sustained by any person who relies on this article. Do your own research!