What Are Sidechains?
If you are reading this article, you know what the blockchain is. What you may not know, however, is that so-called “sidechains” also exist in the distributed ledger ecosystem.
To enlighten you, you will discover what sidechains are and what impact they could potentially have on the future of cryptocurrencies.
The concept of sidechains was first introduced in 2014 in a paper titled ‘Enabling Blockchain Innovations with Pegged Sidechains’ written by a team of developers who later went on to form the blockchain startup Blockstream.
In simple terms, a sidechain is a separate blockchain that is linked to the main blockchain through what is referred to as two-way pegging, which enables digital assets to be interchangeable between the two chains without jeopardizing their performance or speed.
Sidechains are being developed first and foremost to address the issue of blockchain scalability but also to potentially add new functionalities to a blockchain, such as introducing smart contracts for the Bitcoin network, for example.
How do sidechains function?
To transact on a sidechain a bitcoin user first has to send his or her coins to an output address, where the coins are being locked so that the user can then spend them elsewhere. Once this transaction has been completed, a transaction confirmation is communicated across the two chains followed by a short waiting period for security reasons.
Once the waiting period is completed, the equivalent number of bitcoin is released onto the sidechain, allowing the user to then access and spend the coins as he or she pleases. To put coins back on the main chain, the reverse transaction needs to take place.
How sidechains can help to scale blockchains
Everyone who has used bitcoin in late 2017 will remember the excruciatingly high transaction fees that peaked at an average of over USD 50 per transaction in mid-December. This occurred because the Bitcoin blockchain could not accommodate the number of bitcoin transactions that the late-2017 bitcoin gold rush caused. As a result, transactions suddenly took hours to process and high fees made bitcoin unuseable as a spending currency.
In anticipation of this scaling challenge, Bitcoin developers have started to work on sidechains with the belief that they can provide the much-need relief for the Bitcoin blockchain to ensure that the digital currency can survive as its adoption continues to grow globally.
Through the creation of sidechains, much larger transaction volumes can be processed as the main blockchain is relieved of its burden. Hence, a functioning network of sidechains could potentially give blockchain technology the ability to scale to a commercial level.
Having said that, sidechains have not yet been implemented into Bitcoin network as issues such as security and centralization still need to be addressed before we can start spending our bitcoins using sidechains.