Sometimes the technical specifications of the chosen blockchain do not align with the needs of our project. For example, the waiting time for block confirmation may be too long, or it may be too expensive to process all data on-chain. This is where sidechains come in handy. In this article, SmartOSC is going to introduce a sidechain for founders.
What is a sidechain?
A sidechain is a separate blockchain network linked to another blockchain, the parent blockchain or mainnet, via a two-way peg.
These secondary blockchains have their consensus protocols, allowing a blockchain network to improve its privacy and security while reducing the additional trust required to keep the network running.
The ability of sidechains to facilitate a smoother asset exchange between the mainnet and the secondary blockchain is a critical component. This means that digital assets like tokens can be transferred securely between blockchains, allowing projects to expand their ecosystem in a decentralized manner.
Two critical components of the sidechain
Sidechains function effectively thanks to a few key components. These elements are:
- A two-way peg
Sidechains made it easier to transfer digital assets between blockchains, regardless of who owns the assets. No secondary actor should be able to stop the transfer of a digital asset because there should be no counterparty risk involved.
A two-way peg is required to facilitate this transfer between blockchains. Consider this a two-way tunnel with traffic flowing in both directions.
A two-way peg is defined in the sidechain white paper as: “The mechanism by which coins are transferred between sidechains […] a pegged sidechain is a sidechain whose assets can be imported from and returned to other chains.”
Simply put, a two-way peg allows digital assets like bitcoin to be transferred between the mainnet and the new sidechain. No digital asset is ever “transferred.” The assets are not transferred; they are locked on the mainnet, while the equivalent amount is unlocked on the sidechain.
As a result, any two-way pegged operation must assume that the actors, or “validators,” involved in the two-way pegged are acting truthfully. Otherwise, fraudulent transfers may occur, or legitimate transfers may halt.
- Smart contracts
An off-chain process is used to transfer digital assets between a sidechain and its mainnet, so it is necessary to build data exchanges between the two blockchains. Off-chain transactions occur outside of the parent blockchain.
Digital assets are locked in and released on either end of the two blockchains once the transaction has been validated by a smart contract, as previously indicated because transferring digital assets between a parent chain and a sidechain is fake.
Smart contracts minimize foul play by requiring validators on the mainnet and sidechain to act honestly when confirming cross-chain transactions. A smart contract will notify the mainnet of an event that has occurred after a transaction has occurred.
The off-chain process relays the transaction information to a smart contract on the sidechain, which verifies the transaction. After the event is verified, funds can be released on the sidechain, allowing users to transfer digital assets between the two blockchains.
Please remember that this process can occur from the mainnet to the sidechain or vice versa.
Pros and cons of sidechains
- The technology underpins sidechains is well-established and has benefited from extensive research and design improvements.
- Sidechains enable general computation and EVM compatibility (they can run Ethereum-native dapps).
- Sidechains use various consensus models to process transactions more efficiently and reduce user fees.
- Dapps can expand their ecosystem by using EVM-compatible sidechains.
- Sidechains sacrifice some decentralization and trustworthiness in exchange for scalability.
- A sidechain has its consensus mechanism and is not protected by Ethereum’s security guarantees.
- Sidechains cause more trust assumptions (e.g., a quorum of malicious sidechain validatory can commit fraud).
Sidechains have the potential to significantly expand the capabilities of cryptocurrencies, reduce costs, and enable asset transfers between blockchains. There are several approaches to integrating different blockchains, each with an extra level of security trade-off. Building a sidechain is a hard task, but using a pre-existing solution can simplify the application’s architecture, allowing it to support multiple cryptocurrencies with a single codebase.
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