What Are Sidechains and Why Do They Matter for Blockchain Scalability?

By | January 6, 2024 | 17 Comments

In Blockchain technology, one term has been gaining significant traction: sidechains. These little heroes have a big job – making blockchain faster and more efficient.

Even with the blockchain’s potential, blockchain also faces a major challenge: scalability.

In this guide, we’ll break down what sidechains are and why they matter so much for making blockchain work even better. Stick around for the inside scoop on boosting blockchain power!.

Understanding Blockchain Scalability

Scalability refers to the ability of a system to handle a growing amount of work or demand without compromising its performance or security.

For blockchain, scalability means being able to process more transactions per second (TPS) and accommodate more users and applications on the network.

However, most of the existing blockchain platforms suffer from low scalability, which limits their adoption and usability.

For instance, Bitcoin, the first and most popular blockchain, can only process about 7 TPS, while Ethereum, the second-largest blockchain, can handle about 15 TPS.

These numbers are far from the thousands of TPS that are required for mainstream applications, such as online payments, gaming, social media, and more.

One of the main reasons for the low scalability of blockchain is the trade-off between decentralization and efficiency.

Blockchain is a distributed ledger that records transactions in blocks that are linked together by cryptographic hashes. Each block is validated by a network of nodes that follow a consensus protocol, such as proof-of-work (PoW) or proof-of-stake (PoS).

This ensures that the ledger is secure, transparent, and immutable, but also consumes a lot of time, energy, and resources.

How Sidechains Work?

The basic idea of sidechains is to create parallel blockchain networks that can handle different types of transactions or applications, while maintaining interoperability with the main chain.

For example, a sidechain can be designed to support faster and cheaper transactions, smart contracts, privacy features, or specific use cases, such as gaming, identity, or supply chain.

To transfer assets from the main chain to the sidechain, users need to lock their assets in a special contract or address on the main chain, which acts as a bridge. Then, they receive a corresponding amount of tokens on the sidechain, which can be used to transact or interact with the sidechain’s features.

To transfer assets back to the main chain, users need to burn their tokens on the sidechain and unlock their assets on the main chain.

The security and validity of the transfers between the main chain and the sidechain are ensured by a set of validators or nodes that monitor and verify the transactions on both chains.

Depending on the design of the sidechain, these validators can be chosen by different methods, such as election, stake, or reputation. The validators are incentivized to act honestly by receiving rewards or fees, or by risking their stake or reputation.

A typical sidechain implementation creates a transaction on the first blockchain (the mainchain) by locking the assets, then creates a transaction on the second blockchain (the sidechain) and provides cryptographic proofs to the transaction that the assets were locked correctly on the first blockchain.

The Benefits of Sidechains?

Sidechains offer several benefits for blockchain scalability and innovation, such as:

1.Higher throughput:

Sidechains can process more transactions per second than the main chain, by using different parameters, such as block size, block time, or consensus mechanism.

For example, a sidechain can use PoS instead of PoW, which is faster and more energy-efficient. Alternatively, a sidechain can use a federated or delegated model, which reduces the number of validators and increases the efficiency.

2. Lower costs:

Sidechains can reduce the transaction fees and congestion on the main chain, by offloading some of the transactions or applications to the sidechain.

For example, a sidechain can use a different fee structure, such as a flat fee, a subscription fee, or a feeless model.

Alternatively, a sidechain can use a layer-2 solution, such as state channels or plasma, which enable users to perform multiple transactions on the sidechain without committing them to the main chain, until they are finalized or settled.

3. More functionality:

Sidechains can enable more features and capabilities than the main chain, by using different protocols, standards, or languages.

For example, a sidechain can support smart contracts, which are self-executing agreements that can automate various processes and functions.

Alternatively, a sidechain can support privacy features, such as zero-knowledge proofs or ring signatures, which can hide the identity or the amount of the transactions.

4. More experimentation:

Sidechains can foster more innovation and development on the blockchain, by allowing developers and users to test new ideas and solutions on the sidechain, without affecting the main chain.

For example, a sidechain can be used as a sandbox or a testnet, where developers can deploy and debug their applications, or users can try them out, before launching them on the main chain.

Alternatively, a sidechain can be used as a platform or a marketplace, where developers can create and offer their applications, or users can discover and access them, without intermediaries or restrictions.

Disadvantages/Challenges of Sidechains?

Sidechains also face some challenges and limitations, such as:

1. Security risks

Sidechains rely on the security of the main chain, but also introduce new attack vectors and vulnerabilities, such as double-spending, replay, or censorship attacks.

For example, a malicious actor can try to spend the same assets on both the main chain and the sidechain, or to prevent the transfer of assets from the sidechain to the main chain.

To mitigate these risks, sidechains need to implement various security mechanisms, such as fraud proofs, checkpoints, or timeouts, which can increase the complexity and the cost of the system.

2. Compatibility issues.

Sidechains need to maintain compatibility and interoperability with the main chain, but also with other sidechains, which can create technical and operational challenges.

For example, a sidechain may use a different data format, encryption scheme, or programming language than the main chain, or another sidechain, which can cause errors or conflicts.

To overcome these issues, sidechains need to adopt common standards and protocols, such as cross-chain communication, atomic swaps, or inter-blockchain bridges, which can require coordination and collaboration among different stakeholders.

3. Regulatory uncertainties.

Sidechains operate under their own rules and parameters, which may not comply with the legal and regulatory frameworks of the main chain, or the jurisdictions where they operate.

For example, a sidechain may violate the anti-money laundering (AML) or the consumer protection laws of the main chain, or the countries where the users or the validators are located.

To address these uncertainties, sidechains need to follow the best practices and guidelines of the main chain, or the relevant authorities, which can limit their flexibility and functionality.

Conclusion.

Sidechains are a promising solution for blockchain scalability, as they can increase the throughput, lower the costs, and enhance the functionality of the blockchain, while preserving its security and network effects.

Sidechains can also enable more experimentation and innovation on the blockchain, by allowing developers and users to create and access new applications and use cases, without affecting the main chain.

However, sidechains also face some challenges and limitations, such as security risks, compatibility issues, and regulatory uncertainties, which need to be addressed and resolved, before they can achieve mass adoption and usability.

Sidechains are still a nascent and evolving technology, which requires more research, development, and testing, to prove its feasibility and viability.

Sidechains are one of the many ways that blockchain can scale and grow, to meet the increasing demand and expectations of the users and the market. Sidechains are not the only solution, nor the final solution, but they are a significant step forward, in the quest for blockchain scalability.

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