What Are Sidechains?

In the blockchain sector, the ability of transferring data between different protocols was a necessary step towards scaling up and having more reliable communication. That is something Sidechains are meant to achieve. In this article we will dive into this functionality and explain its uses and possibilities.

What Are Sidechains?

Sidechains are an exciting innovation in blockchain technology. They are secondary protocols - or secondary _chains _attached to a main protocol (the parent chain)- that are designed to allow data transferability between themselves and a primary network. These secondary chains are able to both improve security and scalability on the whole, as well as interoperability between these two systems to broaden the possibilities and cater to the needs of users and enterprises in many different fields.
The fundamental advantage of sidechains is that they make it possible to build new, specialized blockchain networks that can be suited to particular use cases without having to start from scratch with a brand-new, independent blockchain. This allows for the development of new features and scalable applications, while still leveraging the security and stability of the parent chain. However, sidechains may differ from the parent chain in certain ways, such as the consensus algorithm or block size. The independence of sidechains, pulls them away from the concept of Layer 2; yet, the objective of scalability connects them.

Why Does Interoperability Matter in Blockchain?

Interoperability between blockchains has been a challenge, especially with the growth of different networks and the rise of this kind of economy the world has been witnessing the past decade. Being one of the main pillars of the digital economy, and arguably the future, there are three main concerns faced by blockchain: the use of infrastructure to maintain it secure, its completely decentralization and its capacity to handle continuously more transactions (scalability).

These three main concerns are known as the Blockchain Trillema. In theory, decentralized networks can only provide 2 of these 3 benefits, and the main goal of several projects in the crypto sector is to provide all three features at once.

With larger blockchains, there comes the need to transfer data and digital assets between different protocols in order to help information circulate faster, as well as update the way these systems relate to each other. The larger it gets, the larger are the challenges of data distribution and consensus validation through a large computing power ecosystem.

Blockchains are meant to be the future of finance. And for that to become a reality, it has to be able to compete with traditional financial firms in an attainable and sustainable way, both gaining scale in both the amount of transactions it is able to process per minute, as well as how fast they can happen. That being said, the security of blockchains are of the utmost concern the more a protocol expands, and finding better ways to distribute ledgers and increase safety against digital threats becomes a priority, and this is where sidechains take place.

Scaling Solutions for Blockchain

In regards to scaling up blockchains, there are a few ways to achieve this:

Layer-1 Protocols

In Layer-1 blockchains (such as Bitcoin, Ethereum and Litecoin), they aim to optimize how the protocol works, both by adding changes to it, as well as using sharding, a way of breaking and sequencing the information available into smaller shards, so that the users analyzing the data do not have to apply an extensive amount of power and computational power in the transaction.

Layer-2 Protocols

Layer-2 protocols are networks operating on top of another blockchain, allowing for more room to innovate, grow and secure the original protocol. It holds part of the transactions from the main system, acting in a way as to alleviate the burden of volume being processed, returning the data to the main blockchain to be accounted for at the end of the process. Amongst their scalability solutions is the use of sidechains.

Sidechains applications

A sidechain works like a separate blockchain that is linked to the main chain in a way that assets and data are capable of passing freely through both networks. It is particularly helpful to scale Layer-1 protocols that have a large batch of transactions to validate, easing their workload, and allowing their role to be maintaining security and resolving disputes. That happens because they usually rely on a different and independent consensus mechanism for their own blocks to be processed.

Sidechains often use a two-way peg approach for transactions, meaning that assets are transferable from and to these chains easily, through the emission of an equivalent value in an account. They have their own blocks and validation systems in place, in order to process this information, as well as their own consensus mechanisms, to make sure that any possible security breach does not impact the main blockchain.

This happens in order to make these transactions faster and easier for daily payments. For instance, a Bitcoin transaction may take up five to ten minutes to confirm, depending on whether the network is backed up or not. That timing makes sense for highly secure financial transactions, but loses relevance to simpler and smaller purchases or trade.

Considering that sidechains have their own unique rules, independent from their underlying chain, their consensus can be simpler, faster and even upgraded more frequently and quickly. These updates allow a lot of room for innovation, experimentation and better development that can later improve the way the main blockchain works. Its consensus mechanism is able to work faster, without a fear of compromising the entire network in case there are major bugs in the system.

And that is why sidechains are considered a very important step towards scaling up blockchain: they allow for easier upgrades and innovation, faster day-to-day transactions, and even though they help alleviate the heavy influx of information into the main chain, their actual impact on the blockchain it is linked to is very minimal, improving safety at the same time as experimenting, and helping build a more concise way of trading cryptocurrency.

Examples of Sidechains

Some examples of sidechains that are currently in use or in development include:

1. Polygon (MATIC): Previously known as Matic Network, Polygon is a sidechain scaling solution for Ethereum. It makes use of a Plasma framework variation to make the Ethereum network more scalable and lower transaction costs. While still being protected by the Ethereum mainchain, Polygon enables the establishment of “child” chains that can manage their own transactions and smart contracts. Polygon is fully capable of interacting with the Ethereum Virtual Machine (EVM), which allows it to support smart contracts written in Solidity, Ethereum’s programming language, as well as manage standard ERC tokens.

2. Liquid Network: A sidechain built on the Bitcoin blockchain that enables faster and more confidential transactions. The Liquid Network has its own native token, L-BTC, which is pegged to Bitcoin, and serves as a representation of bitcoin on the Liquid Network. It is used to pay for transaction fees and incentivize validators to secure the network. The Liquid Network enables the exchange of cryptocurrencies, stablecoins, digital assets, and security tokens on the Bitcoin blockchain. While Liquid Network operates atop Bitcoin’s base layer, it operates independently and uses different methods to achieve higher throughput and more confidential transactions.

Conclusion

Sidechains are separate blockchains, but still linked to a main chain and allowing interoperability between networks. Given this characteristic, and their flexibility of parameters to be set, they act as a relevant solution to the Blockchain Trilemma. They allow the scalability that currently does not exist in the main Layer-1 protocols given their current structures.

This technology could help decentralized finance become even more accessible to the general public, without demanding a large computational power, large sums of currency, or even any risks of network failures due to it not being able to handle a larger number of transactions per second.