The initial concept of sidechains was published in an academic paper on October 22, 2014, by Adam Back, the inventor of HashCash and the current CEO of Blockstream. The publication also included contributions from a group of legendary Bitcoin engineers such as Matt Corallo, Luke Dashjr, and Blockstream co-founder Mark Friedenbach.
While many of the paper’s authors played significant roles in developing the idea of Satoshi Nakamoto’s cryptocurrency system – specifically by integrating HashCash’s proof-of-work consensus mechanism into Bitcoin’s blockchain – they recognized that there was still room for improvement if Bitcoin were to be adopted by a global audience.
In the sidechain whitepaper, the authors noted that Bitcoin’s infrastructure at the time faced a trade-off between scalability and decentralization. There were also concerns about Bitcoin’s privacy and censorship, with new technologies to improve Bitcoin’s cryptographic security seen as necessary for wider adoption of Bitcoin (BTC).
Considering this, the authors proposed the following:
“We propose a new technology, pegged sidechains, which allows bitcoin and other ledger assets to be transferred between multiple blockchains. This enables users to access new and innovative cryptocurrency systems using assets they already own.”
Table of Contents
What is a Sidechain ?
A sidechain is a separate blockchain network connected to another blockchain—referred to as the parent chain or main chain—via a 2-way peg.
These secondary blockchains have their own consensus protocols, which allow the blockchain network to enhance privacy and security while minimizing the additional trust required to maintain the network.
A key component of a sidechain is its ability to facilitate smoother asset exchanges between the main chain and the secondary blockchain. This means that digital assets such as tokens can be securely transferred between blockchains, enabling projects to expand their ecosystems in a decentralized manner.
In practical terms, an individual using the Bitcoin main chain needs to send bitcoin to an output address. This address can be a hardware wallet, a hot wallet, or a sidechain. Once the transaction is confirmed, a notification of the completed transaction is broadcast on the Bitcoin network.
After a brief security check, the sent Bitcoin is transferred to the sidechain, allowing the user to freely move their assets across the new network.
Now, this might sound simple, but several key components enable sidechains to function effectively. These components include:
- A 2-way peg
- Smart contracts
A 2-way peg
To enable seamless transfers between blockchains, a two-way peg is required. You can think of this as a two-way tunnel with cars traveling in both directions.
According to the sidechain whitepaper, a two-way peg is defined as:
“The mechanism for transferring assets between sidechains […] a pegged sidechain is a sidechain whose assets can be imported from and returned to other chains.”
In simple terms, a 2-way peg allows digital assets like bitcoin to be transferred back and forth between the mainnet and the new sidechain. Interestingly, the “transfer” of a digital asset never actually occurs. The actual assets are not moved; instead, they are merely locked on the mainnet while an equivalent amount is unlocked on the sidechain.
Therefore, any 2-way peg operation must assume that the agents or “validators” involved in the peg are acting honestly. If not, fraudulent transfers could be executed, or legitimate transfers could be halted.
Smart Contracts
To transfer digital assets between a sidechain and its main network, an off-chain process—transactions occurring outside the original blockchain—is necessary to transfer data between the two blockchains.
Transfer Process
As mentioned above, since the transfer of digital assets between the main chain and the sidechain is conceptual rather than physical, the digital assets are locked and released at both ends of the two blockchains once the transaction is validated through a smart contract.
Smart contracts are used to minimize malfeasance by ensuring that validators on both the main network and the sidechain act honestly in confirming cross-chain transactions. When a transaction occurs, the smart contract notifies the main network that an event has happened.
Verification and Asset Release
Subsequently, the off-chain process forwards the transaction information to the smart contract on the sidechain, which verifies the transaction. Once the event is verified, the funds can be released on the sidechain, allowing users to move digital assets across both blockchains.
This process can occur from the mainnet to the sidechain or vice versa.
Bitcoin Sidechains
Real-world examples of Bitcoin sidechains include the Liquid Network and RootStock (RSK). Since both sidechains are pegged to Bitcoin’s main network, they only enable activities related to Bitcoin.
Liquid Network
The Liquid Network is an open-source sidechain created by Blockstream, built on Bitcoin’s main network. By leveraging the inherent features of sidechains, Liquid Network has a block discovery time of just one minute, significantly faster than Bitcoin’s 10-minute block generation time. This means that blocks can be added to the sidechain ten times more frequently than to Bitcoin’s blockchain. The network also allows users to trade digital assets more privately by concealing the amounts and types of assets being transferred.
- Liquidium: Revolutionizing Bitcoin Borrowing and Lending with Airdrops
- The Rise of Liquidswap: Unpacking Aptos’s Groundbreaking AMM Protocol
RootStock (RSK)
RSK is a sidechain designed to run smart contracts. When using RSK, bitcoins are locked on the mainnet and released as smart bitcoins (SBTC), the native currency of RSK.
Due to RSK’s smart contract proficiency, users do not need to convert their bitcoins into other assets to use smart contracts. This means they can interact across different blockchain networks, such as Ethereum.
Potential of Sidechains
Sidechains have tremendous potential to expand the scope, scale, and dynamics of blockchain technology, enabling previously separate blockchain networks to integrate into a unified ecosystem.
Macro Perspective
On a macro level, imagine a universal blockchain network comprising multiple blockchains, each with its own consensus mechanism, governance rules, and vision, yet all interconnected. Cross-chain interoperability supported by sidechains would allow users to navigate seamlessly across these diverse projects. This is the fundamental value proposition of sidechains.
