An Introduction to Sidechains

Sidechains have become essential for helping pre-existing blockchains like Bitcoin to scale and become more interoperable.
Mar 7, 2022 at 5:00 p.m. UTC
Crypto Explainer+

Stephan Roth is a London-based financial journalist and has reported on crypto since 2018. He has previously worked for KPMG, CNNMoney and ACCOINTING.

The first concept of a sidechain was published in an academic paper on the Oct. 22, 2014, by Adam Back, the inventor of HashCash and current CEO of Blockstream. Also involved were a host of legendary Bitcoin engineers such as Matt Corallo, Luke Dashjr, Blockstream co-founder Mark Friedenbach and more.

While many of the paper’s authors played instrumental roles in developing Satoshi Nakamoto’s idea of an electronic cash system – namely the integration of HashCash’s proof-of-work consensus mechanism into Bitcoin’s blockchain – they realized there was still room for improvement if Bitcoin was going to service a global audience.

In the sidechain white paper, the authors noted that Bitcoin’s infrastructure, at the time, faced trade-offs between scalability and decentralization. There were also concerns about Bitcoin’s privacy and censorship, with new technologies improving Bitcoin’s cryptographic security deemed necessary if more people were to adopt the bitcoin (BTC) currency.

Taking this into consideration, the authors put forward the following:

“We propose a new technology, pegged sidechains, which enables bitcoins and other ledger assets to be transferred between multiple blockchains. This gives users access to new and innovative cryptocurrency systems using the assets they already own.”

What is a sidechain?

A sidechain is a separate blockchain network that connects to another blockchain – called a parent blockchain or mainnet – via a two-way peg.

These secondary blockchains have their own consensus protocols allowing a blockchain network to improve its privacy and security, and minimize the additional trust required to maintain a network.

A key component of sidechains is their ability to facilitate a smoother asset exchange between the mainnet and the secondary blockchain. This means that digital assets such as tokens can be securely transferred between blockchains – allowing projects to expand their ecosystem in a decentralized manner.

In practical terms, an individual using the Bitcoin mainnet needs to send bitcoin to an output address. This address could be a hard wallet, a hot wallet or a sidechain. Once the transaction is confirmed, a notice of the completed transaction is broadcasted across Bitcoin’s network.

Following a brief security check, the sent bitcoin is transferred onto the sidechain, allowing users to freely move their assets across the new network.

Now, as simple as that may sound there are a few key components that allow sidechains to operate effectively. These components include:

  • A two-way peg
  • Smart contracts
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Sidechains (CoinDesk)

Two-way peg

Sidechains were developed to facilitate the transfer of digital assets between blockchains, regardless of who is the holder of the assets. Digital assets should be able to be moved without any counterparty risk – meaning that no secondary actor should be able to stop the transfer of the asset from occurring.

To facilitate this transfer back and forth between blockchains, a two-way peg is required. You can think of this as a two-way tunnel with cars driving in both directions.

According to the sidechain white paper, a two-way peg is defined as:

“The mechanism by which coins are transferred between sidechains […] a pegged sidechain is a sidechain whose assets can be imported from and returned to other chains.”

Put plainly, a two-way peg allows digital assets such as bitcoin to be transferred back and forth between the mainnet and the new sidechain. Interestingly, the “transfer” of a digital asset never occurs. The assets are not actually transferred; instead, they are simply locked on the mainnet while the equivalent amount is unlocked in the sidechain.

As a result, any two-pegged operation needs to assume the actors, or “validators,” involved in the two-way pegged are acting honestly. Otherwise, fraudulent transfers could be made, or genuine transfers could be halted.

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Two-way peg (Blockstream.com)

Smart contracts

To transfer digital assets between a sidechain and its mainnet, an off-chain process – transactions occurring outside of the parent blockchain – that transfers data between the two blockchains must be built.

As mentioned above, because the transfer of digital assets between a parent chain and sidechain are imaginary, digital assets are locked in and released on either end of the two blockchains once the transaction has been validated via a smart contract.

Smart contracts are used to ensure that foul play is minimized by enforcing validators on the mainnet and sidechain to act honestly confirming cross-chain transactions. Once a transaction has occurred, a smart contract will notify the mainnet that an event has happened.

Then, the off-chain process will relay the transaction information to a smart contract on the sidechain, verifying the transaction. After the event has been verified, funds can be released on the sidechain, allowing users to move digital assets across both blockchains.

Note, this process can occur from the mainnet to the sidechain or vice versa.

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Mainnet to Sidechain illustration (Ulam.io)

Bitcoin’s sidechains

Real-life examples of sidechains are Bitcoin’s Liquid Network and RootStock (RSK). Since both sidechains are tied to Bitcoin’s mainnet, only activities involving bitcoin are possible.

The Liquid Network is an open-source sidechain created by Blockstream built on top of Bitcoin’s mainnet. By using the features inherent in sidechains, the Liquid Network’s block discovery time is just one minute, a lot quicker than Bitcoin’s 10-minute block-time. This means 10 times as many blocks can be added to the sidechain versus Bitcoin’s blockchain. The network also allows users to transact digital assets more privately, by masking the amount and asset type being transferred.

RSK is a sidechain designated to run smart contracts. When using RSK, bitcoin is locked on the Mainnet and is released as smart bitcoin (SBTC), RSK’s native currency.

Due to RSK’s smart contract proficiency, users do not need to convert their bitcoin into other assets to make use of the smart contract. This means they are interoperable on other blockchains networks such as Ethereum.

The potential of sidechains

Sidechains have great potential to expand the scope, scale and dynamics of blockchain technology, allowing previously secluded blockchain networks to become integrated into one common ecosystem.

Taking a macro perspective, imagine a universal blockchain network consisting of numerous blockchains, each with its own consensus mechanism, governance rules and vision yet they all remain independent from one another.

The cross-chain interoperability facilitated by sidechains would allow users to seamlessly navigate across these various projects. This is the fundamental value proposition of sidechains.

This article was originally published on Mar 7, 2022 at 5:00 p.m. UTC

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Stephan Roth is a London-based financial journalist and has reported on crypto since 2018. He has previously worked for KPMG, CNNMoney and ACCOINTING.

CoinDesk - Unknown

Stephan Roth is a London-based financial journalist and has reported on crypto since 2018. He has previously worked for KPMG, CNNMoney and ACCOINTING.


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