What are sidechains?

Table of Contents

  1. What are sidechains?
  2. Benefits of sidechains
  3. Drawbacks of sidechains
  4. Three sidechain examples

What are sidechains?

Sidechains are defined differently depending on who you ask. The definition of what constitutes a sidechain has a long, colorful history. In the most general sense, a sidechain can be described as a blockchain that can interact with another blockchain.

There are two basic types of sidechains, those with two independent blockchains, and those where one blockchain is dependent on the other. In the case of the former, both blockchains can be thought of as the sidechain of the other, which is to say they are equal, and sometimes both blockchains will have their own (separate) native token. As for the latter, one sidechain can be thought of as the parent chain and the other as the dependent or ‘child’ chain. Typically in a parent-child sidechain relationship, the child chain does not create its own assets. Instead, it derives any assets from transfers from the parent chain.

Sidechains can interact in many different ways, however it almost always includes the ability to exchange assets between the chains. This is achieved through the use of a 2-way peg. The easiest 2-way peg to understand is a centralized exchange, which works like this: You have BTC, but you want ETH, so you exchange BTC for ETH via the BTC-ETH pair. Unfortunately, using a centralized exchange requires relying on a central trusted party, something that demands intermediary fees and brings third-party risk. There is a better way.

A decentralized 2-way peg basically consists of ‘lockboxes’ on both blockchains. Let’s look at a simplified example to illustrate how these lockboxes are used to facilitate the transfer of assets from one chain to another.

Imagine you want to transfer 1 BTC from the Bitcoin network to a sidechain. First, you send a transaction for 1 BTC to a designated lockbox address on the Bitcoin network. Any Bitcoin that’s in the lockbox is effectively removed from the total supply of Bitcoin for the time being. In that transaction, you also include information about the sidechain address you want to send the BTC to. Once the transaction is received by the Bitcoin network and added to the blockchain, the sidechain lockbox releases 1 BTC and sends it to the address indicated in the Bitcoin network transaction. To send the BTC back, you simply reverse these steps.

In crypto, the system to move assets from one chain to another and back through a 2-way peg is often called a bridge. Bridges are not limited to transferring assets; assets can be exchanged too. A bridge can do BTC → BTC, but it could also be designed to do BTC → ETH. Bridge architecture can vary greatly. For example there are Powpegs, SPV, federated, and collateralized systems.

Benefits of sidechains

Sidechains bring three main benefits: scalability, experimentation/upgradeability, and diversification.

Scalability: A sidechain can offer faster and cheaper transactions through many optimizations, for example, by moving a certain type of transaction to another chain whose protocol is purpose built for that type of transaction. This should decongest the first chain, making the first chain faster and cheaper too. Sidechains can also use much faster, newer techniques that are more efficient.

Experimentation/upgradeability: Upgrading an entrenched blockchain with diverse stakeholders can be difficult. Reaching consensus can be slow, if not impossible. Sidechains allow new ideas to be tested and deployed without broad consensus. This experimentation and upgradeability enables many of the efficiencies that contribute to scalability.

Diversification: Assets from other blockchains can be made accessible to more people. Applications such as lending and borrowing in DeFi can gain access to assets from other chains.

Drawbacks of sidechains

Sidechains are responsible for their own security; a sidechain’s security is not derived from the blockchain it is bridged with. This is both a positive and a negative. It means poor security in one blockchain does not affect the security of the connected blockchain. However, this means popular blockchains like Bitcoin cannot lend any security strength to smaller, less popular blockchains.

On a related note, sidechains require their own miners. A large pool of diverse miners is an important way most blockchains secure their network. Newer chains must do their best to grow their mining ecosystem, but this can be difficult because newer chains are often less lucrative for miners. Sidechains can make this even worse, because in parent-child sidechains, the child chain typically does not have its own native coin. This acts as a disincentive for miners because their chief source of income is from the issuance of native coins.

Finally, some people might make assumptions about their assets on one blockchain that are not true when transferred to another. For example, if you hold BTC because of Bitcoin’s security and trust model, it's pretty much guaranteed that if you transfer BTC to a sidechain, the security will be less robust, and the trust model will be different.

Three sidechain examples

Drivechain

Drivechain is an example of the second type of sidechain mentioned above -- ‘parent-child.’ Bitcoin is the parent and Drivechain is the child, thus Drivechain does not issue a native token. Instead, it relies solely on BTC transferred from the Bitcoin network. Drivechain uses SPV to implement its 2-way peg, which relies on miners to validate transfers. 51% attacks by a coalition of miners are possible. A unique feature of Drivechain is the creation of blind merged mining (BMM), which addresses the drawback of sidechains requiring their own miners. BMM allows a miner on the Bitcoin blockchain (parent) to mine on Drivechain (child) without running a Drivechain full node, and the miner is paid in BTC.

Drivechain hopes to give people the ability to transfer bitcoins from the Bitcoin network to sidechains and back. This will hopefully give bitcoin holders access to a diverse range of blockchains.

SmartBCH

SmartBCH is an example of the first type of sidechain -- 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 unique bridge called SHA-Gate. Transferring from BCH to SmartBCH is handled by BCH full-node clients. Transferring from SmartBCH to BCH uses a federation for operation, and miners for supervision.

SmartBCH is an example of a more ambitious project. While it hopes to improve transaction times (block intervals are in seconds compared to BCH’s 10 minutes) and bring robust smart contract features to BCH, its most exciting aim is to provide the benefits of projects like ETH2.0 in a much shorter time. For example, smartBCH has increased the block gas limit to 16 billion, compared to Ethereum’s 15 million. This substantially increases smartBCH’s theoretical transactions per second.

To get started using SmartBCH, you’ll need to purchase some BCH, which you can do through the Bitcoin.com Wallet, via the Bitcoin.com website, or on any major exchange. Then you’ll need to set up a Web3 wallet. You can use the integrated crypto wallet in Brave browser, or use Metamask.

Polygon

Polygon is a mixture of both types of sidechains. It uses an Ethereum framework called Plasma, which allows the creation of child chains that can process transactions before periodically being finalized on the Ethereum blockchain. Polygon is EVM compatible. On the other hand, Polygon issues its own native token, MATIC, through Proof-of-Stake validators. It features two 2-way pegs, one through Plasma and one through the Proof-of-Stake validators.

Polygon aims to provide connections between blockchains. Since Polygon is EVM compatible, connecting with other blockchains that are also EVM compatible, such as SmartBCH, should be less challenging than blockchains that aren’t, like Bitcoin.

To get started using the Polygon network, you’ll need to purchase some MATIC, which you can get on our site here, then set up a web3 wallet.

Read more: Understand the key layer-2 solutions on Ethereum.

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