What Are Sidechains? How do Sidechains Work? (+ VIDEO)
What Are Sidechains?
Sidechains are not a new concept in the cryptocurrency space. The idea first appeared in 2014 when a number of important figures in cryptography and early digital currency development published an academic paper presenting Pegged Sidechains. A few of the authors are central figures at Blockstream, who is a leading innovator in sidechains and other Bitcoin progresses.
A sidechain is a separate blockchain which enables to secure transport and use of tokens plus other digital assets from one blockchain to a separate blockchain, which is then linked back to the original blockchain if needed. Through this mechanism, the primary blockchain network is not compromised in terms of speed and performance as the sidechain operates independently from it.
Sidechains were created exclusively to enhance certain traits of the blockchain and are defined for one specific use case. There can be several sidechains which have different tasks distributed accordingly for improving the efficiency of processing. Other applications could include optimization for higher speeds and for larger computations. Regardless, sidechains can be used to control the usage of commercial blockchains.
How Do Sidechains Work?
A sidechain is an independent ledger that is attached to its parent (main) blockchain via a two-way peg. The two-way peg lets digital assets be interchanged among them at a programmed rate between the main blockchain and the sidechain. The primary blockchain is usually referred to as the ‘main chain’ and all linked blockchains are called ‘sidechains’.
When someone from the parent chain wants to transfer their assets to a sidechain, they first have to transfer their coins to an output address, where the coins will be locked so the user cannot spend them elsewhere.
After the transaction has been completed, a confirmation is shared across the chains followed by a waiting period for extra security. After the waiting period, the correspondent number of coins is released on the sidechain, enabling the user to access and spend them there. The opposite process occurs when the transfer from the sidechain is made back to the main chain.
The Basic Technology
A federation is a cluster of servers that function as an intermediate point between the main chain and a sidechain. The Federation determines when the sent coins are locked up and also when they are released. The developers of the sidechains are able to pick the participants of the federation. The sidechain creators can select which servers form the federation. The disadvantage of using federations is that they put an additional layer between the sidechains and the primary chain.
The main advantage of sidechains is that they are independent of their main chain. This means that sidechains handle their security separately. If a problem should happen on the sidechain, it can be contained without disturbing the main chain. The same goes for the main chain, in case it is hacked or compromised, the sidechain will not be affected even though the peg will have its value significantly diminished.
Sidechains need to have their own miners. Miners can receive rewards through merged mining, a process where two different cryptocurrencies functioning on the same algorithm are mined at the same time.
Advantages of Sidechains
Sidechains aim to be a solution to a frustrating issue – that addition of new features to a crypto like bitcoin is a dangerous venture since $230 billion are at risk if the new feature fails to work or malfunctions.
Sidechains facilitate interactions among cryptocurrencies. They enable developers to test Beta releases of Altcoins or software updates before implementing them on to the main chain. Traditional banking tasks like supplying and tracing ownership of shares can be trialed first on sidechains before moving them onto main chains. If the security mechanisms for sidechains can be increased, sidechain technology could be used for a massive blockchain scalability.
Another advantage of sidechains is that they are permanent. You do not have to build a new sidechain each time it is required that you use one. Once a side chain is created, it is managed and preserved so it can be used by any developer performing a specified task off the main chain.
Via the creation of sidechains, much larger transaction volumes can be managed as the principal blockchain is relieved of its burden. Even so, a functioning network of sidechains could potentially offer blockchain technology the ability to grow to a commercial level.
Bearing this in mind, sidechains have not yet been implemented into Bitcoin network as issues like security and centralization still need to be solved before we can start investing our bitcoins using sidechains.
Disadvantages of Sidechains
Miners are required to make sure that the other sidechains are secure. This makes the creation of new sidechains a costly process. A significant amount of investments has to be made before any new sidechain can be built. Another downside of the sidechains is the must-have federation. The extra layer formed by the federation could prove to be a weak point for attackers.
Over the past few years, all the current blockchains have expanded greatly in terms of length and storage space. Therefore, it has been quite a struggle for some of these ledgers (Ethereum in particular) to cope with such huge network volumes. Sidechains have the potential of extending the scalability of the system and bringing many other advantages to the blockchain network. All that is needed is some time and further experimentations.