Sidechains are emerging technologies that allow tokens and other digital assets from one blockchain to be securely used in a separate blockchain and then be moved back to the original blockchain if needed. Sidechain has enormous potential to expand the capabilities of existing blockchains.
The sidechains concept was first described in 2014 in White Paper of Blockstream project —
The developers of the sidechain concept aims to create a wide global network of linked together blockchains, each of which have their own protocol, rules and a set of functions. However, all of them, will be pegged to Bitcoin and protected by it's mining network. Saidchains can also be used to model the changes in the bitcoin codebase.
In addition, sidechains are also intended for commercial use. For example, Liquid, a Blockstream's sidechain, is designed to serve bitcoin exchanges, processing services and traders. Liquid is pegged via a sidechain to the Bitcoin blockchain, that helps to reduce transaction time between exchanges to several seconds.
How do Sidechains work?
A sidechain is a separate blockchain with a two-way peg to its parent blockchain. The two-way peg enables interchangeability of assets at a predetermined rate between the parent blockchain and the sidechain. The original blockchain is usually referred to as the ‘main chain’ and all additional blockchains are referred to as ‘sidechains’.
A user on the parent chain first has to send their coins to an output address, where the coins become locked so the user is unable to spend them elsewhere. Once the transaction has been completed, a confirmation is communicated across the chains followed by a waiting period for extra security. After the waiting period, the equivalent number of coins is released on the sidechain, allowing the user to access and spend them there. The reverse happens when moving back from a sidechain to the main chain.
What is a Federations?
Federation is a group of operators that serves as an intermediate point between the main chain and one of its sidechain. The federation determines when the user's coins are "locked" and when they can be spent. The sidechain creators can choose the members of the federation. The disadvantage of this model is that it adds additional layer between the main chain and the blockchain increasing the risks of centralization.
In January 2017, Blockstream introduced a new sidechain’s White Paper with updated consensus mechanism and trust model, as well as a mechanisms that ensure refunding assets (sent to the parent chain) in case of failure.
In fact, ''Strong Federations'' are well-designed multi-signature addresses in which bitcoins are ‘locked’. They can be unlocked only after confirmation of the authenticity of payment by a sufficient number of key holders. This function provides publicly verifiable, reliable transaction networks that allow to move any asset between different markets without requiring trust to any party.
Is it secure to use Sidechains?
Sidechains are responsible for their own security. Enough mining power to secure a sidechain may lead to its hacking. As each sidechain is independent, in case of its hacking, the damage will be contained within this chain and won’t affect the main blockchain. Accordingly, if the main blockchain is compromised, the sidechain can still operate, but the peg will lose most of its value.
Sidechains need their own miners which can be motivated via ‘merged mining’ — the simultaneous mining of two separate crypto-currencies, based on the same consensus algorithm.
— is Blockstream's first sidechain. The company calls this technology "a more reliable and efficient system for moving bitcoins associated with exchanges." It is expected that sidechain Liquid will be launched in the first quarter of 2018.
— is a bitcoin sidechain with a turing-complete virtual machine that is compatible with the interface of decentralized Ethereum applications. The launch of the main network of the platform, called Bamboo, took place in January 2018. The developers say that in the future, the Bamboo sidechain will be able to create smart contracts for Litecoin network.
— is a blockchain platform for second-generation decentralized services from the Nxt team. Ardor uses the Proof of Stake consensus algorithm. Ardor's sidechains (‘childchains’) are tightly integrated into the main chain. All transactions are secured and processed by parent chain forgers. Most transactions are pushed down to the childchain level, as the parent mainchain retains minimal features. Global entities such as assets and currencies across chains can be accessed through childchains. Beta release of the Ardor took place in February 2017.
is a blockchain application platform that enables developers to create, distribute and manage decentralized Blockchain applications by deploying their own sidechain linked to the Lisk network, including a custom token. Thanks to the flexibility of sidechains, developers can implement and customize their Blockchain applications entirely.