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What is a Sidechain in blockchain
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What is a Sidechain in blockchain

Sidechain is a separate network connected to another blockchain (parent blockchain or mainnet) through a two-way peg. These side networks operate their own consensus protocols, which helps to improve their privacy and security and minimize additional trust required for network maintenance. A user from the parent chain sends their coins, and when the transaction is completed with additional security measures, the assets reach a user from a sidechain (the same is true for transactions from sidechains to main chains).

Sidechains’ ability to exchange assets with their mainnet help to enlarge a project’s ecosystem in a decentralized way.

Two basic types of sidechains exist. The first kind involves independent blockchains (when both of them can be treated as sidechains to one another, they are equal and may even have their own separate native tokens), in the second case one blockchain is dependent on one another (one blockchain is parent and the other is called a ‘child’ chain, which cannot create its own assets, but derive them from parent chain transactions).

Sidechains can interact in many various ways, but their main activity is exchanging assets between the chains, which is done using two-way pegs, which can be centralized and decentralized (often consisting of ‘lockboxes’ on blockchains).

There is another specification, called ‘federation’, which represents a kind of a link from parent to side chains and has to ensure transaction transparency. Creators of the sidechain elect federation members, which provides extra security but brings about the issue of extra intermediaries.

Sidechain examples

The most known sidechains are Bitcoin and Ethereum ones. Ethereum sidechains can have separate block parameters and consensus algorithms, they offer additional abilities but do not fall under Ethereum security properties. One of such chains is Polygon. It uses Plasma (Ethereum framework) and the transactions on the child chain are often finalized on the Ethereum blockchain. It uses a native token (MATIC) and features two pegs (one through Plasma and the other through PoW validators) and is aimed at building connections between blockchains.

Bitcoin sidechains are sidechains connected to the Bitcoin protocol. One of them is called Drivechain, which is a parent-child sidechain. Bitcoin is its parent chain and Drivechain does not have its own token, using BTC. It has a unique feature, called BMM (Blind Merger Mining) which allows miners on the parent chain to mine in the child chain (running a full node is not necessary here and the miner gets reward in BTC).

SmartBCH is an ‘independent blockchain’ type (1st type). It combines EVM and a sidechain for Bitcoin, however, without a native token. It uses its own specific bridge (SHA-gate), with transfers from BCH to SmartBCH carried out by BCH full-node clients, while in reverse cases a federation is responsible for operation and miners are responsible for supervision. It aims at improving transaction time and adding strong smart contract traits to BCH.

Sidechain Blockchain Platforms

There are many projects which are using this technology. Some of them are more popular than others. One example is RSK (RootStock). It is pegged to Bitcoin blockchains. The project enables using smart contracts of Ethereum via Bitcoin sidechains releasing users of the obligation to convert Bitcoin to any other asset. It also gives users the ability to lend and borrow Bitcoins, while lenders earn interest on lent coins and borrowers have a fair share of control over interest payments with no need for a third-party. Parties agree upon the terms which are reinforced by a smart contract (unlike the way it happens in traditional banks).

Another example is Ardor’s Blockchain with parent-to-child architecture. Child chains use their own cryptocurrency (while the main token ARDR is used for governance and operated on the mainnet), which are enlisted in an Ardor-centric exchange. These child chains can be utilized as databases or record-keeping storages. It is Proof-of-stake, and the technology allows any user to run their own blockchains (it built a kind of network of blockchain economies, interoperable with each other). Another example is called Liquid, the currency of which (LBTC) is backed by Bitcoin 1 to 1. Users can use it to acquire other crypto, lend it or issue assets (such as stablecoins or other). The platform offers Bitcoin owners extra abilities, which are not available on the Bitcoin chain.

Benefits and issues

As a specific type of network, related to blockchain, a sidechain has its benefits, which encourage them to develop. Among them there are the following:

  • Scalability. A sidechain can increase the parent blockchain performance by taking on some part of the workload. Different sidechains can maintain different transactions at the same time, so that the parent blockchain works more efficiently. Sidechains may provide faster and cheaper transactions (for example, by transmitting transactions of a certain type to another chain, with a protocol built for this type, which increases the speed and may reduce costs).
  • Flexibility. The rules of blockchain never change if the majority of participants did not agree on it, however, sidechain brings a little more freedom (they may be treated as blockchains interlaced among themselves, but they have their own protocols, so this makes their work more flexible).
  • Upgradability. It may be problematic sometimes to upgrade a fully-formed blockchain. It takes a lot of time to reach a consensus (if possible at all). At the same time, sidechains provide changes and inventions being tested and even deployed without such complications as wide consensus, which brings about more efficiency and scalability.
  • Diversification. Sidechains help to make assets from different blockchains accessible to a wider public from other chains.
  • Independence. If a sidechain is compromised, the damage will not spread on the parent chain. If the main chain is compromised, sidechains can work, but pegs would lose their value.

However, nothing is perfect and there are some issues. The main issue refers to security. Sidechains are flexible and follow their own rules, and these facts bring about a bunch of vulnerabilities. They are responsible for their own security, and if the production capacity is not large, they become more vulnerable to hackers. Another weak point is centralization. As federations play a role in connecting a side chain to the parent one, they take hold on the side chain, which makes the chain more centralized than its counterpart. Sidechains must have their own pools of validators, but usually they do not have their own coins, which makes them much less attractive.

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