What are sidechains and how do they work?

Main

• Sidechain is a blockchain scaling technology by creating a parallel network with two-way binding to the main one.
• The main problem that the sidechain solves is to increase the speed of transactions and reduce their cost for the crypto assets of the “parent” network.
• The main disadvantage of the sidechain is the reduced security due to the limited decentralization of the sidechain.
• Now sidechains work mainly for two blockchains: Bitcoin and Ethereum.

How does the sidechain work?

Within a few years of its launch, the bitcoin network began to reach its limits of scalability, with many crypto projects emerging that offered much faster speeds and much lower transaction fees.

In 2014, Blockstream developers for the first time described the concept of sidechains (the literal translation from English is “side chain”), which would allow to bypass the shortcomings of bitcoin.

They described the idea of ​​creating a separate, additional blockchain, which at the same time will have a two-way binding to the “parent” network with the ability to transfer assets.

According to the original concept, the user of the parent blockchain must first send coins to the outgoing address. There they are blocked for a short period of time for verification, which is designed to eliminate the possibility of double spending.

After the transfer is confirmed, the coins are transferred to the sidechain, where they can be freely used. If desired, the holder of coins can similarly return them to the original blockchain.

Today, sidechain technology is used mainly for Bitcoin and Ethereum, two of the most popular projects in the crypto industry that are experiencing bandwidth difficulties.

What are bitcoin sidechains?

The most famous bitcoin-based sidechain to date is Liquid Network by Blockstream, built on the source code of the project. Elements. To create the latter, the Bitcoin codebase was used, however, in Liquid, the block creation time was reduced from 10 minutes to 1 minute by reducing decentralization.

There is no native asset in Liquid. Instead, it uses the likeness of a “wrapped” L-BTC token, which is issued when bitcoins are transferred from the “native” blockchain to the sidechain. L-BTC is backed by bitcoin in a ratio of 1:1. In addition, the sidechain from Blockstream has confidential transaction features.

At the same time, Liquid cannot be called as decentralized blockchain as Bitcoin. project governs the “federation” – a relatively small group of organizations distributed around the world and independent of each other.

They vote on protocol updates, manage nodes and so-called “functionaries”. These are keys for a multisig wallet that requires at least 11 of the 15 functionary keys to validate a bitcoin transaction. Each of the trusted members of the “federation” controls one of the keys.

As of 2022, Liquid has not been widely adopted in the cryptocurrency market and operates more like a private blockchain: institutional investors, applications, and wallets use the sidechain.

On the Liquid blockchain released a small amount of stablecoins Tether (USDT). Early September 2022 became known about Blockstream’s plans to launch a decentralized bitcoin exchange XDAX, whose users will be able to exchange assets based on Liquid.

Another well-known bitcoin sidechain is Rootstock, which has a built-in virtual machine that allows you to create smart contracts. In August 2022 WakeUpLabs and Kilimo announced plans to issue non-fungible tokens on the Rootstock network.

What are the features of sidechains for Ethereum?

The problem of scaling is especially acute for the Ethereum blockchain platform. In one form or another, a number of crypto projects offer its solutions. One of these areas are sidelines.

Their fundamental difference from Ethereum is the ability to use a different consensus algorithm, such as Byzantine Fault Tolerance, Proof-of-Authority or Delegated Proof-of-Stake (DPoS). At the same time, more advanced block parameters require reducing the level of decentralization by reducing the number of full nodes. This also affects security.

An important feature of Ethereum sidechains is compatibility with the Ethereum Virtual Machine. Such networks support contracts written in the Solidity language. Thanks to this, applications for the Ethereum ecosystem can be easily deployed on its sidechain.

What are the sidechains for Ethereum?

At the moment, there are several Ethereum sidechains on the crypto market. One of them is Polygon Proof of Stake (PoS), which is part of the Polygon ecosystem. Polygon PoS consists of three levels:

1. Bor. The level responsible for distributing transactions by sidechain nodes into new blocks. Periodically, the nodes are “mixed” using a committee system for greater security.
2. Heimdall. A “layer” of Proof-of-Stake consensus that confirms the blocks produced by the Bor layer and aggregates them into a Merkle Tree and then publishes it to the Ethereum mainnet in order to reach finality.
3. Staking smart contracts.

Polygon PoS has a bandwidth that is many times greater than the “parent” network. The developers estimate the sidechain speed at 7000 Tx/s versus 15 Tx/s for Ethereum. The native cryptocurrency of Polygon PoS is MATIC.

The transfer of assets from Ethereum to Polygon PoS is carried out through a bridge that blocks the cryptocurrency and releases it on the Polygon sidechain. The “relay” mechanism is responsible for this: in order to confirm a cross-chain transfer, the consent of two-thirds of the sidechain validators is required.

In addition to Polygon PoS, Loom Network can be distinguished among Ethereum sidechains. It is a multi-chain platform for decentralized applications launched back in 2017. Loom Network using as a base layer an EVM-compatible network called Basechain, which operates on the basis of the DPoS algorithm. The project’s native token is the LOOM token of the ERC-20 standard.

Also on the list of Ethereum sidechain projects are Skale and Gnosis Chain. The developers of the popular blockchain game Axie Infinity are developing the Ronin sidechain connected to Ethereum via a cross-chain bridge, which was restarted in the summer of 2022 after a massive hack. Ronin is used for transactions of in-game assets, in particular NFTs and SLP and AXS tokens.

How safe is the use of sidechains?

Sidechains rely on their own security system. The limited decentralization required for greater scalability makes validators, miners, and other key sidechain participants more likely to be hacked. This is exactly what happened in the case of Ronin.

Since each sidechain is independent, if it is hacked or compromised, the damage remains within that chain and does not affect the main blockchain. If the main blockchain is compromised, the sidechain will continue to work, but its link to the parent chain will be depreciated.

Some bitcoin sidechains operate on the basis of the mechanism of “joint mining” – the simultaneous mining of two separate cryptocurrencies based on the same consensus algorithm.