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What are Bitcoin Sidechains? How Do They Work?

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Over a decade since blockchain was introduced to the world, scalability remains the main obstacle. Right now, established protocols like Ethereum and upcoming projects like Cardano and Algorand are all racing to increase transactions per second. The higher those numbers get, the more things can be done on the blockchain.

Yet, there has been a solution for scalability problems brewing on the periphery sidechains. These are single-use blockchains connected to the main net. This means that a single main chain can have many specialized channels for different types of transactions. Vanilla transactions between peers can have their own pipeline, while complex smart contracts can go a different way. The construction of specific use lanes in the blockchain can help manage network congestion and relieve pressure.

This idea was first introduced on October 22nd, 2014, on a paper titled ‘Enabling Blockchain Innovations With Pegged Sidechains.’ In this paper, the authors discussed the possibility of using what they denominated as ‘alt chains’ to transact with different crypto coins and blockchains. By having specific networks for specific coins, usage could be directed to one channel instead of having one singular blockchain do all the work.

How do sidechains work?

Generally speaking, the sidechain is a separate blockchain attached to the main network by the use of a bidirectional channel called a ‘peg’. The two-way communication allows for the exchange of assets between the ‘parent chain’ and the ‘child chain’ at pre-established moments in time. The main blockchain or ‘main-chain’ can have as many side-chains attached to it for various uses. But, each individual small chain has to be single-purpose so it can attract just that one kind of traffic.

A transaction is initiated when a person on the main net sends tokens to the output address. The tokens are then locked to prevent double-spending. The process is completed and confirmation is propagated throughout the main chain. Then an equivalent number of tokens is released on the side chain for use. Once the transaction of the child chain has reached the destination, the reverse process happens so the new owner can have its tokens on the main net.

To understand why transactions on the main chain are slow by default, check out this article on bitcoin block size.

How to secure sidechains?

A major drawback is that a side-chain has fewer nodes than the main chain, thus making it more vulnerable for a 51% attack. This means that vulnerabilities could potentially increase and more child chains are added to the main one. Of course, this also means that an attack on a side-chain is contained in that space alone.

A compromised side-chain won’t affect the main network and this could be seen as a positive. Also, operability inside the side-chain would not be compromised if the main net is attacked. All of the tokens locked in the side-chain will remain unaffected. Of course, if the parent network suffers an attack, the validity of this network comes into question, therefore making it difficult to regain trust in the protocol.

Side-chains also need to be mined. This means a separate token for a child-chain could be used as an incentive for prospective nodes. Since a node could mine the coin of the main net and the token of the side-chain, this would multiply economic incentives for the miners.

Right now, most sidechains work under a federated model. This means a centralized body is in charge of governing the child chain. They can decide when a user has moved their tokens out of the channel and into the main net. This adds a layer of centralization that can be a major negative for those looking for maximum decentralization.

Some notable sidechains are,

Plasma

This side chain is first touted as the solution for Ethereum’s scalability problem, but it seems plasma chains have an uncertain future. The concept was first introduced in August 2017 to much promise and fanfare. The idea was to create as many side-chains connected to Ethereum as needed, but many problems quickly appeared with the model. In 2019, most of the discussion of using plasma had disappeared from the Ethereum development community.

It is notable that the OmiseGo (OMG) group recently launched a plasma chain. The project is continuously developing the idea and keeping plasma chains alive for Ethereum.

Rootstock (RSK)

This is a layer two solution for Bitcoin that uses open-source smart contracts to create a two-way peg to the main network. It uses merge mining to incentivize the BTC to also provide computing power to their network. The project claims the ability to process 100 transactions per second on each of its chains. This means scalability for the Bitcoin network is close to realization.

Bitcoin Hivemind

This sidechain is a peer to peer oracle digital system and a market place on the Bitcoin network. It pools users’ Bitcoins to predict price movements in capital markets of the crypto space. Each channel is constructed as a sidechain of the Bitcoin network.

As we move towards the future, many technologies have emerged to tackle the scalability problem of Bitcoin. In fact, entire altcoins have been designed with the sole purpose of increasing transactions per second. We are witnessing a battle of technological ‘threes,’ each racing to solve the problem and get the reward.

Although sidechains were introduced to much acclaim a few years back, however, they seem to be falling into disfavor as blockchain developers look for other viable solutions.

One of these new viable solutions is the Bitcoin Lightning network.

However, it is possible that a new breakthrough in technology will propel sidechains once again to the top of the line. None of us can say for sure.

Disclaimer - OBN is an informational website which aims to give the latest blockchain related news to the readers. Articles on OBN should not be considered as investment advice. Trading cryptocurrencies is a high-risk investment, every user is advised to consult an expert before making any decisions.