Sidechain

What Is A Sidechain?

A Sidechain is an alternative blockchain network connected to the main blockchain via a bridge. The primary purpose of this chain is to improve the efficiency and speed of the parent blockchain network. In short, it attempts to reduce the workload of the latter. 

These sidechain blockchain networks use the two-peg mechanisms. It allows the transfer of digital assets from the main net to this chain and vice versa. It also creates a bridge that runs parallel to the primary blockchain. However, there are severe complexities and security issues involved in this network. 

• Sidechain meaning refers to another blockchain that is supposed to reduce the workload of the leading blockchain (also mainnet). 
• It works on the two-way peg mechanism and smart contracts. This chain enables the transfer of digital assets from the mainnet (like Bitcoin and Ethereum) to this new chain. 
• The concept was proposed by cryptographer Adam Back in the paper "Enabling Blockchain Innovations with Pegged Sidechains" in October 2014. 
• Some of the projects of this chain include a liquid network, polygon, skeleton, rootstock, gnosis chain, and Loom network. 

How Does A Sidechain Work?

Sidechains are separate blockchains that act as a child-like chain to the parent blockchain. They create a bridge by connecting the main blockchain to them for transfers of digital assets. They are usually done to reduce the workload on the mainnet. In this context, mainnet refers to the original blockchain network like Bitcoin, Ethereum, and others. However, actual transfers do not occur initially. Instead, assets are locked within the main blockchain, and an equivalent amount is transferred to the sidechain.

Cryptographer Adam Back first introduced the concept in his paper titled Enabling Blockchain Innovations with Pegged Sidechains, published in October 2014. In addition, along with Back, several other crypto enthusiasts also contributed to this concept. Its sole purpose was to cut the load on a single ledger by creating a pegged mechanism. It is meant to distribute the ledger into a parallel chain. 

This chain further communicates via two-pegs and smart contracts. In basic terms, a two-way peg mechanism facilitates the transfer of assets from the original blockchain to the sidechain. However, users are required to initially send these assets to a designated output address, where they become locked and unspendable before being transferred to the sidechain.

Validation is crucial for the transfer of these digital assets. And it majorly happens through smart contracts. They act as an essential element of sidechain security by restricting counterparty risk. However, moving assets from the mainnet to the child chain without smart contracts is quite complex. 

Its effect contains specific protocols that contribute to its effectiveness. They include Proof-of-Stake (PoS), Proof-of-Authority (PoA), delegated PoS, Proof-of-Burn (PoB), and Proof-of-Activity. However, these protocols may differ across the sidechains. Although they seem similar, the infrastructure differs widely. They might follow the same manner, but their function depends on their variations. 

Sidechain Projects

There are several sidechain projects on decentralized platforms. Few of them belong to popular blockchains like Bitcoin and Ethereum. Let us look at them:

#1 - Liquid Network 

The liquid network is an independent ledger created by Blockstream. The primary purpose of Liquid is to support the mainnet (Bitcoin). Compared to the mainnet, the block discovery time of the liquid network is one minute. However, the parent blockchain took ten minutes to perform a similar task. Liquid also encrypts asset details during transfers. 

Suggested by Adam Back in 2016, this chain was launched on September 27, 2018. At that time, back led this child chain along with other projects. 

#2 - Rootstock 

RSK is another child chain operating on the Bitcoin blockchain that started in 2016. It uses smart contracts by locking the assets and converting them into smart Bitcoin (SBTC). As the assets return, they are again converted into their original token form (BTC). However, users cannot convert assets into any other currency during this process. 

#3 - Polygon Sidechain 

The polygon is a layer two scalability solution created on the Ethereum blockchain in 2017. Originally known as Matic Network, polygon uses a Matic token to reduce transaction fees on the parent blockchain. Users can also transfer assets from the Ethereum platform to the Polygon network. A real-time example includes the coffeehouse Starbucks using a polygon sidechain for its loyalty program. A similar Plasma Chain project works on layer two scalability solutions. 

#4 - Skale 

It is another child chain project on the Ethereum platform. Skale supports a low-cost and high-performance environment. In this project, zero gas fees are involved. As a result, the users can easily migrate assets from the EVM blockchain to the Skale chain. 

#5 - SmartBCH

Considering Bitcoin Cash as the mainnet, SmartBCH aims to move DeFi applications from the parent blockchain to Smart BCH. For this purpose, a two-way peg is created to secure the transactions. 

#6 - Gnosis Chain

The Gnosis chain is the first sidechain of the Ethereum blockchain. It works on PoAP (proof of attendance protocol) to ensure faster transactions. Besides, users can also collect non-fungible token (NFT) badges from events attended and pay the gas fees. 

#7 - Loom Network 

It is another child chain that runs parallel with the Basechain blockchain. This network works with multiple cryptocurrencies, working on EVM and smart contracts. 

Examples

Let us look at some real-time and hypothetical examples to comprehend the concept in a better way:

Example #1

Suppose XYZ is a famous blockchain technology developed by HYU Labs in the digital space. Several users and Decentralized Finance (DeFi) applications have been created on this platform. On average, 4 million transactions occur every day. During the process, the block discovery time they were increased by an immense amount. As a result, HYU Labs created a sidechain (Opuus) that will help to distribute the load on the XYZ blockchain. This new chain will act as a child to the main net. So, whenever transactions occur, the latter will lock the assets, and a similar amount is transferred to Opuus. 

After a point, Opuus will return these assets (like DeFi applications) to XYZ in less time. As a result, this chain acts as an independent ledger that runs parallel to the original blockchain. 

Example #2

In an update dated January 13, 2023, Shaurya Malwa reported that the company behind the Cardano blockchain has introduced a toolkit for constructing custom sidechains, enabling developers to tailor blockchains for specific purposes within the system. Sidechains enhance transaction capacity, mitigating the risk of network downtime by processing additional data. 

This toolkit aims to augment Cardano's scalability without compromising stability or security. Each sidechain can have its consensus algorithm, ensuring that applications on a sidechain remain functional regardless of Cardano's network rules. These sidechains are interconnected with the main chain through a bridge facilitating asset transfer between them. Despite this development, Cardano's native ADA token experienced minimal fluctuations in value, reflecting the broader stability observed across the cryptocurrency market.

Advantages And Disadvantages 

Sidechain has widespread usage within every blockchain technology. However, this chain has various limitations. Let us look at them:

Advantages	Disadvantages
It solves the problem of scalability by facilitating faster processing of blockchain transactions.	Sidechain security effects may result in vulnerabilities and data issues, primarily due to smart contracts.
There is enough flexibility as it allows easy transfer of assets from the mainnet to the child chain.	Delays and inefficiencies can compromise the security of assets during asset transfers.
Offloading blockchain work can significantly reduce transaction fees.	The implementation of child chains can involve complexities at every level.
These chains provide a platform to test and build decentralized finance (DeFi) applications.	These chains demand a high level of assumptions for their functioning.
Child chains employ different consensus to promote the efficiency of the parent blockchain.

Sidechain vs Cross Chain

Although sidechain and cross chain tend to build bridges across the other end, they function differently. Thus, it is crucial to look at their differences for a better understanding of their features:

Content	Sidechain	Cross Chain
Meaning	It refers to a separate, parallel blockchain that bridges to the original blockchain (mainnet).	Cross-chain acts as a medium to connect the different blockchains.
Purpose	To promote the efficiency and speed of the mainnet.	To support direct exchanges between different blockchains in less time.
Key Components	Two-way peg mechanism and smart contracts.	Asset swap and Asset Transfer.
Origin	Adam Back developed it in October 2014.	It was proposed by the Tendermint team in 2014.
Transfer	The digital assets are locked here, and equivalent amounts are transferred from the mainnet to the new chain.	In a cross-chain, only data is transferred from one blockchain to another.

Frequently Asked Questions (FAQs)

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