Everything to Know About Sidechains, Their Capability, and Scope

Ever since blockchain came into being, it faced a big challenge of scalability. Right off the bat, experts boasted about the ledger’s security and transparency. However, they knew that it could never be as mainstream as PayPal or Netbanking. That’s because it can’t execute voluminous transactions in a matter of seconds. That’s why developers had to come up with different solutions. That is how sidechain cames in; an innovative concept that aims to resolve this issue.

Exploring Sidechain

Adam Back, the inventor of HashCash and CEO of Blockstream introduced it first. On October 22, 2014, he released an academic paper that explained sidechain. He was joined by other renowned Bitcoin engineers like Mark Friedenbach, Matt Corallo, and Luke Dashjr. Notably, some authors of this paper played a pivotal role in Satoshi Nakamoto’s electronic cash system. 

They talked about the integration of HashCash’s PoW consensus into Bitcoin. Soon, they realized the original crypto had plenty of scope for improvement. In the sidechain paper, they mentioned interoperability and decentralization. It also discussed the privacy and censorship issues of Bitcoin and its solutions provided by cryptographic security. 

How Does Sidechain Work?

In essence, a sidechain is an additional blockchain linked to the main network. It is a two-way bridge to establish a connection and enable transactions. Moreover, a sidechain can be public or private. It has its own consensus algorithm along with tokens and protocols. This additional chain can run decentralized apps as well. 

It can share the computational load of the mainchain and help it upscale. Any number of sidechains a user can link to the main blockchain. Depending on the design of the blockchain, multiple sidechains could be connected with the main architecture. Developers can even create an inter-sidechain communication link if needed.

Furthermore, they can be combined with other scaling solutions for better functionality. Essentially, the sidechain executes a transaction on the first blockchain by locking the assets. It then creates a transaction on the second blockchain while documenting all of them. After the completion, it provides cryptographic proof that the assets have been locked. 

Sidechain has two major components that crypto users must know about. 

Two Components of Sidechain

Two-Way Peg

The primary function of a sidechain is to facilitate the transfer of digital assets. By design, digital assets need to move without any counterparty risk. It means that the transfer of the assets can’t be stopped by any third party. To make these frequent transactions easy, sidechains deploy a two-way peg. 

It functions like a two-way channel conveying information in both directions. As per the whitepaper, a two-way peg is a mechanism for transferring assets between different sidechains. It seamlessly executes the exchange from one sidechain to another. So, if it’s implemented in blockchain, the asset could be transferred from the mainnet to the sidechain. 

However, it should be noted that the transfer of crypto never happens. They are simply locked on the mainnet and an equivalent amount is created in the sidechain. A two-peg system works on trust established by the actors or validators. They can either act with honesty or make fraudulent transfers. 

Smart Contracts

An off-chain process is formulated to transfer digital assets between a mainnet and a sidechain. This process involves transactions taking place outside the primary blockchain. It should be noted that transfers between the primary chain and the sidechain are imaginary. As mentioned above, the asset doesn’t get transferred. Instead, its value is realized on the sidechain.

Whenever that happens, a smart contract validates the transaction. With smart contracts, the possibility of fraud is minimized. Because it rules out the requirement of a real transfer of assets. Instead, it implements validators on the mainnet and ensures transparency of the sidechain. After the transaction, the smart contract notifies the mainnet about the completion of the process.

The users can use their crypto using both blockchains. They should also remember that this process can happen from the mainnet to the sidechain or vice versa. 

Bitcoin’s Sidechains

Liquid Network and RootStock (RSK) are two sidechains of Bitcoin. The liquid network works on top of the Bitcoin mainnet as an open-source program. The most notable thing about this sidechain is its block discovery time of one minute. It’s way faster than Bitcoin’s 10-minute block time adding 10 times more blocks to the sidechain. 

The network also facilitates digital assets more privately. It masks the assets and amount being transferred. 

RSK runs smart contracts and follows a certain process. Bitcoin gets locked on the mainnet using this sidechain. It uses its native currency to release the assets as a smart contract. RSK enables users to use smart contracts without converting their Bitcoin into other assets. This particular functionality makes Bitcoin’s sidechains as interoperable as Ethereum.

Upshot

Experts believe that sidechains can give good results if implemented well. If they’re explored further, their implementation could get easier. The crypto community is hopeful that such innovations make crypto more mainstream. But it remains to be seen how many decentralized protocols adopt it. Even if doesn’t work for some, it certainly gives them something to explore. Thus, it’d be safe to say that sidechains bring more possibilities to blockchain.

Amanda Shinoy is one of the few women in the space invested knee-deep in crypto. An advocate for increasing the presence of women in crypto, she is known for her accurate technical analysis and price prediction of cryptocurrencies. Readers are often waiting for her opinion about the next rally. She is a finance expert with an MBA in finance. Quitting a corporate job at a leading financial institution, she now engages herself full-time into financial education for the general public.