A sidechain allows tokens from one blockchain to be securely used in a separate parallel blockchain. Tokens can still be moved back to the original chain if necessary. Think of it like how a car driving in the express lane can merge back into the regular highway lanes.
This sidechain is attached to the parent chain through a two-way peg. The two-way peg utilizes Simple Payment Verification or SPV to show and prove ownership of the assets on the parent chain.
A user on the parent chain first sends their coins to an output address. The coins then become locked so the user can’t spend them elsewhere. Once the transaction completes, a confirmation is communicated across the chains after a waiting period. Next, the equivalent number of coins are released on the sidechain, and the user can spend them there. The reverse happens when moving back from the sidechain to the main chain.
Why Have a Sidechain?
The intention is to allow blockchains to scale and could allow for different cryptocurrencies to interact with one another. The Bitcoin Core community sees sidechains as a way to offer smart contracts and other things that Ethereum offers on their blockchain. Others argue that splitting sections of the network onto various sidechains doesn’t mean that Bitcoin can scale to an infinitely larger amount of transactions per second.
Is the Lightning Network a Sidechain?
The Lightning Network is not a sidechain. It is an off-chain activity which doesn’t happen on the blockchain. Those transactions are not recorded on the Bitcoin blockchain except for the channel’s open or close. Raiden is the Ethereum version of the Lightning Network that settles the state more frequently kind of like backing up your computer once a year vs. every few months.
Sounds Like a Good Idea, But Is It?
Federations are a select few who ultimately determine if or when the coins you use between the main blockchain and the sidechain are locked up and released. This is a colossal centralization issue which goes against the reason Bitcoin came to exist. Bitcoin was founded with the intention of creating a source of money that couldn’t be sized, taxed, inflated or controlled like our current fiat money. Having sidechains be centralized go against everything that Bitcoin stands for which lead to the splitting of Bitcoin Core and Bitcoin Cash and the ideological differences between the two communities.
Another issue is that sidechains will need their own miners, and they aren’t incentivized the same as miners on the main chain are. Merge mining has been proposed as a solution to this. Merge mining is allowing two different cryptocurrencies based on the same algorithm to be mined simultaneously. This is supposed to enable low hash cryptocurrencies to increase the hashing power behind their network. It’s like having an experienced businessman on the board of directors for your startup.
Some people see this as a threat to Ethereum because it would allow Bitcoin’s network the ability to have smart contracts on their platform. However, Bitcoin maximalists refuse the centralization aspect of sidechains and instead opt for using colored coins on Bitcoin Cash’s blockchain.
What Companies are Focusing on Sidechain Development?
A few notable companies trying to work out the kinks of sidechain implementations are Blocksteam & Rootstock, and Plasma.
Blockstream is the blockchain technology company that funds Bitcoin Core. They are the originator of sidechains but are also working on off chain scaling options as well. Elements Alpha is the open sourced code pegged to Bitcoin’s testnet that works through a centralized protocol adapter.
Rootstock or RSK is a smart contract platform that is connected to the Bitcoin blockchain through sidechain technology. Ginger is their open source test net for smart contracts. They incorporate a Turing complete virtual machine to Bitcoin. This is essentially the same source code that runs on Ethereum. By being backward compatible with Ethereum, they can harness and build on the work that Ethereum developers have already done on their platform.
Plasma is a series of contracts which runs on top of a root blockchain. Plasma will get rid of unnecessary data in the root chain. It will handle smart contracts much like its foundation, but will only broadcast completed transactions to the public Ethereum chain.