What is a Sidechain?
Sidechains are a concept first surfaced in 2014 when several important developers in cryptography and early digital currency published their paper on Pegged Sidechains.
A sidechain is a blockchain separated from the original blockchain, which enables users to securely transport tokens and other digital assets between blockchains and then link back to the original blockchain if required.
Through this process, the primary blockchain network will have a more enhanced performance and speed as the sidechain works autonomously from the main chain.
The purpose for which sidechains were created was to improve certain blockchain characteristics, they can be programmed for one specific task.
Sidechains can take on different tasks such as improving the efficiency of processing or the optimization for higher speeds for larger computations. Nevertheless, sidechains can be used to manage commercial blockchains.
A sidechain is a separate ledger connected to its parent (main) blockchain through a two-way peg. The two-way peg enables crypto assets to be exchanged between them at an automated rate.
The process of transferring assets from the parent chain to a sidechain first involves having to move their coins to an output address, where the coins are locked to prevent the user from spending them elsewhere.
Upon the completion of the transaction, the confirmation is transmitted across the chains. After a waiting period, the coins will be released on the sidechain, letting the user access and spend them there. The reverse procedure takes place when the coins are transferred from the sidechain to the main chain.
A federation is a group of servers which operates as a transitional point between the main chain and a sidechain. The federation decides when to lock up the sent coins as well as when to release them. The developers of the sidechains are responsible for selecting which individuals will form the federation. The sidechain creators also choose which servers are used in the federation. The drawback of using federations is that it adds another layer between the sidechains and the main chain.
The primary benefit of sidechains is their independence from the main chain. This poses as an advantage as sidechains can manage their security separately. If a problem were to occur on the sidechain, it would have no impact on the main chain.
The same applied to the main chain in the attempt of a hack, the sidechain will remain unaffected, although the value of the peg will be notably reduced.
Sidechains have their own miners which are able to get rewards through merged mining. This aspect involves two different cryptocurrencies which use the same algorithm being mined simultaneously.
Advantages of Sidechains
Sidechains enable cryptocurrencies to interact among each other more easily. They also serve as a testbed for developers to release the beta version of their software updates or altcoins before introducing them to the main chain.
Traditional banking procedures such as supplying and tracking ownership of shares can be initially tested on sidechains before transferring them onto main chains. If the security mechanisms for sidechains can be improved, sidechain technology could have the appliance in a massive blockchain scalability.
Another key feature of sidechains is that they are permanent. This means that developers are not required to create sidechain after sidechain when they want to use one for a specific task. Once a sidechain is built, it can be further managed and used by any developer which want to execute a certain task of the main chain.
Sidechains improve the performance of blockchains when confronted with much larger transaction volumes as they take on part of the burden. Therefore, an operational network of sidechains could potentially enable blockchain technology to scale beyond their predetermined sizes.
In spite of these possible solutions which sidechains can bring to a network, their implementation in the Bitcoin network is still debated as there are still issues such as security and centralization which need to be addressed.
Disadvantages of Sidechains
Miners must ensure the security of the other sidechains. Therefore, creating a new sidechain is a costly process as a lot of resources have to be invested before any new sidechain can be generated. Another disadvantage to sidechains is that in order to function they require a federation. The federation is an in-between layer which could be a vulnerability exploited by attackers.
In just under two years the blockchain ecosystem has greatly developed length and memory wise. This has posed quite a problem for some ledgers, as they struggled with huge network volumes. Sidechains are a potential solution to the scalability issue and can bring more enhancements to the features of a blockchain network. Of course, taking into consideration the young age of this technology, further development and trials are still needed.