What Are Sidechains?

What Are Sidechains?

So you can understand everything you need to about sidechains, we’ve split this article into four parts as follows:

  • What Are Sidechains?
  • Benefits of Sidechains
  • Downsides of Sidechains
  • Examples of Sidechains

Read on to get the complete lowdown by reading the full article or check out just the sections that you need help with.

What Are Sidechains?

At the basic level, a sidechain can be defined as a blockchain that has the ability to interact with another blockchain.

There are two different and basic kinds of sidechains:

  1. A sidechain that has a blockchain that’s dependent on a second blockchain
  2. A sidechain that has two independent blockchains

For the sidechain in #1, one sidechain acts as a parent to the second “child” sidechain. In this type of parent-child scenario, the “child” cannot create its own assets but rather needs to derive assets from the parent chain via transfers.

For sidechain type #2, both blockchains are equal to the other, they can act as the sidechain of the other and sometimes both blockchains will have their own native token.

While sidechains can interact in a variety of ways, most of the interactions are the exchange of assets between the chains through the use of a 2-way peg.

You can have a 2-way peg on a centralized exchange or a decentralized 2-way peg.

Centralized 2-Way Peg

On a centralized exchange, a 2-way peg will work as follows; You own BTC but want ETH, so you exchange BTC for ETH via the BTC-ETH pair. However, because there is a third-party involved, you can also expect to pay third-party fees and deal with any risks or delays from that centralized exchange.

Decentralized 2-Way Peg

With a decentralized 2-way peg, you are essentially using virtual lockboxes on the blockchains to enable the transfer of assets between the two sidechains.

For example, you want to transfer 5 Bitcoin to a sidechain from the network. First, you’d send a transaction for 5 Bitcoin to a specified lockbox address on the network. 

The information about the sidechain address that you want to send it to is also included in this transaction information. This Bitcoin is then removed from the total supply of BTC temporarily.

After the transaction is received on the network and added to the blockchain, the sidechain lockbox releases the 5 Bitcoin and sends it to the address that was specified in the Bitcoin network transaction.

You can do this process in reverse if you want to send any of the Bitcoin back to where it came from.

This process of moving assets from one chain to another via a 2-way peg is often referred to as a bridge. With a bridge, assets can be transferred or exchanged, for example, you can transfer BTC but also transfer BTC to ETH.

Benefits of Sidechains

There are three main benefits of sidechains that we’re going to go into below.

  • Scalability
  • Upgradeability
  • Diversification

1. Scalability

Using a sidechain can be faster and cheaper as you can move transactions through the sidechain thus unblocking the first chain. A sidechain can work like another lane on the highway that allows more traffic to flow making everyone’s journey on that highway faster.

2. Upgradeability

Sidechains mean that new ideas can be deployed and tested without the need for consensus. Experimentation and testing on the sidechain can help improve the upgradability without involving the stakeholders on the blockchain.

3. Diversification

Assets from other blockchains can be made more accessible to more people since transfers can be made across different chains.

Downsides of Sidechains

For all the good, you’ll always have the bad and there are a few downsides to using sidechains.

1. Security

The security of a sidechain is not taken from the blockchain that it is bridged with. Rather, it’s responsible for its own security which means that popular and secure blockchains like Bitcoin cannot give any of its security strength to smaller or less secure blockchains.

2. Miners

As well as requiring its own independent security, sidechains also need their own miners. Usually, on a blockchain, the large group of diverse miners is how the blockchain secures its own network. However, chains must do their best to grow their mining ecosystem.

3. Misconceptions

When using sidechains, it’s easy to assume that you’ll get the same features on one blockchain as you do on another. But this isn’t always the case.

For example, the Bitcoin blockchain is secure and trustworthy, this is why many people hold BTC and have confidence in it. However, if you transfer any of your BTC to a sidechain, you won’t benefit from the features of the BTC blockchain just because you’re using Bitcoin.

Examples of Sidechains

Let’s look at three examples of sidechains to help you understand the concept further.

1. Drivechain

Drivechain is an example of a parent-child sidechain. Bitcoin is the parent and Drivechain is the child. Therefore, Drivechain does not have a native token, rather, it relies solely on Bitcoin that has been transferred over from the BTC network.

Drivechain uses SPV to implement its 2-way peg which needs miners to validate all the transfers. One of the special features of Drivechain is the BMM or Blind Merged Mining which addresses the downside of sidechains needing its own miners.

BMM lets a miner on the BTC blockchain mine on the Drivechain without running a Drivechain full node.

Drivechain aims to give people the power to transfer BTC from the network to sidechains and back allowing for a more diverse range of blockchains to be used.

2. Polygon

Polygon is an example of a sidechain that uses a mixture of the two types. It uses an Ethereum framework called Plasma, which allows the creation of child chains that can process transactions before occasionally being finalized on the Ethereum blockchain.

The polygon sidechain aims to provide connections between blockchains that weren’t previously compatible. You’ll need a web3 wallet in order to use the polygon network.

3. SmartBCH

SmartBCH is an example of the two independent blockchains. SmartBCH is an Ethereum Virtual Machine (EVM) and Web3-compatible sidechain for Bitcoin Cash but does not have its own native token. SmartBCH uses a bridge called SHA-Gate which transfers from BCH to SmartBCH and is handled by BCH full-node clients.

Transferring from SmartBCH to BCH uses a federation for operation and miners for supervision. The SmartBCH aims to improve transaction times for users.

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