Sidechains

One of the biggest drawbacks of decentralized platforms is scalability. For example, Bitcoin and Ethereum are limited in their transactions (per second) compared to centralized payment companies such as VISA. This issue, also called the scalability problem, is a well known challenge for decentralized platforms. Bitcoin, for example, can only handle a maximum of 7 transactions per second. VISA however, can process over 20,000 transactions per second. This is of course a huge difference and if Bitcoin, or crypto as a whole, wants to compete with entities such as VISA, they still have a very long way to go. Fortunately, there are several layer 2 solutions to improve scalability, one of them being sidechains.

What is a sidechain?

A sidechain is a separate blockchain that is connected to the parent blockchain (main chain) using a two-way link. This means that in addition to the main chain, one or more blockchains exist that are linked to it and can communicate with the main chain. In other words, you can move your cryptocurrencies from the main chain to the sidechain and back again.

The main reason for creating such sidechains is to take most of the work off the main blockchain. For example, the Bitcoin mainchain does all the work that can be done and that's a lot. Hence, only a maximum of 7 tp/s are possible. Moving the lion's share of this work to other blockchains associated with it saves a lot of work on the main chain, freeing up a lot of space. This allows the main chain to focus on what is most important, which is safety in almost all cases. Sidechains can be, for example, specially designed for micropayments.

How a sidechain works

To be able to use a sidechain, you need to use the main chain. From the main chain you can send a number of the relevant cryptocurrency to a special 'exit address'. The coins will be locked at this address, so you can no longer spend them. Once you have done this, a simple payment verification (SPV) will take place. This confirms on all chains that your cryptocurrency's are no longer on the main chain. It normally takes a while for your coins to be sent to the side chain. This waiting period was set on purpose to make it even more difficult for malicious parties to engage in 'double spending'. After this period, the exact amount of cryptocurrency on the side chain will be released for you to spend.

The pros and cons of sidechains

The sidechains are great for scaling blockchains. However, everything has its drawbacks. Let’s summarize the pros and cons of sidechains.

Advantages of side chains

  • It ensures that the biggest share of the work is taken off the main chain. This makes the blockchain (much) more scalable.
  • Different side branches of a cryptocurrency can arise, each of which has its own specialty.
  • It ensures that cryptocurrencies can communicate with each other. They are also perfect for developers to experiment with. For example, before a Beta release is released on the main chain, it can first be tested on a side chain.

Cons

  • The biggest disadvantage of sidechains is that they need to be secured just as well as 'normal' blockchains. This means that it requires miners to keep an eye on whether everything that happens on it is legit. With Bitcoin, miners are rewarded for this in the form of BTC. Unfortunately, this is not possible with side chains. So another solution must be devised to give miners a motivation to keep the network safe.
  • In many cases, sidechains are not the best solution for solving scalability. If we look at global payment traffic, a few sidechains will not ensure that blockchain technology will be able to handle all this traffic. Communicating the side chains with the main chain will then still cause delays and expensive transactions.

Examples of sidechains

xDai

xDAI is the network which houses the first ever USD stable blockchain. Designed to be efficient and user friendly, the xDAI blockchain can process transactions instantaneously and in an inexpensive process and at the same time pegging the value to 1 USD per xDAI. The range of tools available for users makes xDAI easily adoptable by users looking to transfer value in an easy to use manner.

The xDAI chain is a EVM sidechain which is very similar to Ethereum but instead uses a different consensus model. The chain uses similar functionality as ETH 1.0 meaning developers can easily create their smart contract and develop them on the xDAI sidechain, with cheaper costs and quicker transfer times using the xDAI token.

Usage of the xDAI chain helps solving the problem of instability and congestion on the Ethereum network. Users can rely on xDAI to bypass Ethereum’s high gas fees when there is high traffic by using the xDAI chain.

RSK

Rootstock (RSK) is a two-way pegged sidechain to Bitcoin intended to facilitate full Turing-complete smart contract functionality for the Bitcoin ecosystem. Along with improving transaction speeds and increasing scalability, it focuses on adding smart contract functionality to the Bitcoin ecosystem. The RSK Virtual Machine (RVM) is the core of the smart contract platform that enables EVM-compatible smart contracts to seamlessly run on RVM.

RSK can scale around 300 transactions per second without sacrificing decentralization and reduce storage space. Its new set of services is designed to advance transactability. RSK, with its protocols such as DECOR and GHOST, can even bring instant payments to the network, whereas transaction time in Bitcoin is much higher.

Loom network

The Loom Network is an Ethereum-based sidechain platform focused on social media and gaming dApps. It aims to relieve congestion issues on Ethereum using offchain development and interoperability.

LOOM, the native ERC-20 cryptocurrency token of the Loom Network, is a membership token that’s staked for access to Loom Network dApps. Proprietary tokens can be created on sidechains. The Dapps on the Loom Network are called DAppChains and run on their own independent blockchains. Any consensus, rules, and other details can be customized per chain. Quite some projects are developed on Loom Network, and it’s expected to continue growing its ecosystem.

Polygon

Polygon (MATIC), also classified as a commit chain, is a framework for creating interconnections between blockchain networks. It tries to address some of Ethereum's main limitations - including processing capacity, poor user experience (delayed transactions), and lack of community governance. Polygon does this by using a new sidechain solution.

The long-term goal is to enable an open, borderless world where users can seamlessly use various decentralized products and services without having to navigate through middlemen first. The aim is to create a hub to which different blockchains can easily connect, while overcoming some of their individual limitations, such as high cost, low scalability and limited security.

Polygon differentiates itself from “regular” sidechains because it uses a variety of extra technologies including:

  • POS Chain: Polygon's main chain is an Ethereum sidechain known as the Matic POS Chain, which adds a layer of Proof of Participation (POS) security to blockchains launched on Polygon.
  • Plasma chains: Polygon uses a scaling technology known as plasma to move assets between the base chain and the sidechains via plasma bridges.
  • ZK Rollups: An alternative scaling solution used to merge a large number of off-chain transfers into a single transaction.
  • Optimistic Rollups: A solution that works on top of Ethereum to facilitate near-instant transactions through the use of Proof of Fraud.

Conclusion

As time goes by, more and more users are interacting with blockchains. Due to the limited scalability of blockchains, sidechains can be used to prevent blockchains to overload and improve overal scalability. The ultimate goal of sidechains is to make the main chain only focus on high-value transactions, pegging of sidechains and an overal safe environment.