What are sidechains?
Sidechains is a technology that is under active development, allowing tokens and other digital assets of one blockchain to be used securely in another blockchain and then (if necessary) to be returned to the original blockchain. The sidechain concept was originally described in 2014 in a white paper written by Blockstream developers, Enabling Blockchain Innovations with Pegged Sidechains.
What are sidechains for?
The creators of the sidechain concept in the future see a wide global network of many interlocking blockchains, each of which will have its own protocol, rules and a set of functions. All of them, however, will be tied to Bitcoin and protected by its mining network. Sidechains can also be used to model the changes considered for the Bitcoin code base.
In addition, sidechains are intended for commercial use. For example, the Liquidstream sidechain developed by Blockstream is designed to serve bitcoin exchanges, processing services and traders. It reduces the time required for transactions between different accounts.
Despite the fact that Liquid is essentially a private blockchain, unlike many closed-loop systems, it is built on top of the Bitcoin blockchain and helps reduce the time it takes to transfer funds between exchanges to a few seconds.
How do sidechains work?
Sidechain is a separate blockchain with two-way binding to the parent blockchain. This ensures the interchangeability of assets with a given intensity. Parent blockchain is usually called the “main (main) chain”, additional chains – sidechains.
The user of the parent blockchain must first send the coins to the outgoing address, where they are “locked” by the participants of the so-called “federation”, which is designed to exclude the possibility of spending them elsewhere. At the end of the transaction, its participants receive confirmation, however, for added security, this happens after a certain waiting period. After that, the equivalent amount of coins is transferred to the sidechain, and the user has the opportunity to spend them. When sending coins from the sidechain to the main blockchain, the reverse process occurs.
What is a federation?
A federation is a group of operators that acts as an intermediate point between the main chain and one of its sidechains. The Federation determines when the user’s coins are “locked” and when they can be spent.
At the same time, the creators of sidechains can choose members of the federation. The disadvantage of this model is the presence of an additional layer between the main chain and the blockchain and, as a result, the risks of centralization.
In January 2017, Blockstream introduced a new white paper sidechain containing an updated consensus mechanism and a trust model, as well as a description of the mechanisms that ensure the return of funds sent to the parent chain in case of failure.
The new technical description is called Strong Federations: An Interoperable Blockchain Solution to Centralized Third Party Risks (Strong federations: solving interchangeable blockchains in relation to risks associated with centralized third parties).
In fact, Strong Federations are well-designed multi-signature addresses in which bitcoins are “locked”. They can only be unlocked if the payment is authenticated by a sufficient number of key holders. Such a function provides publicly verifiable, reliable transaction networks that allow you to move any asset between markets with different characteristics without requiring centralized trust on any side.
Is it safe to use?
Sidechains themselves are responsible for their safety. In the absence of sufficient mining power to ensure security, the sidechain can be hacked. Since each sidechain is independent, if it is hacked or compromised, the damage remains within this chain and does not affect the main blockchain. Accordingly, if the main blockchain is compromised, the sidechain will continue to work, but its binding to the parent chain will depreciate.
Sidechains need their own miners, which can be stimulated through “combined mining” – the simultaneous production of two separate cryptocurrencies based on the same consensus algorithm.
What sidechain platforms are there?
The most famous platform to date is Blockstream’s Liquid. The company calls this technology “a more reliable and efficient system for moving bitcoins related to exchanges.” Liquid sidechain is expected to be launched in the first quarter of 2018.
Also widely known is the RSK platform (Rootstock) – a bitcoin sidechain with a turing-complete virtual machine that is compatible with the decentralized application interface ethereum. The launch of the main network of the platform called Bamboo took place in January 2018. The generation of blocks in the RSK network is carried out in the combined mining mode with bitcoin. The developers also say that in the future, the Bamboo sidechain will be able to create smart contracts for the Litecoin network.
Ardor, a blockchain platform for second-generation decentralized services from the Nxt team, offers sidechain technology as a business solution. Its key difference is the use of Proof of Stake as a consensus algorithm, while the sidechains themselves, being closely integrated with the main blockchain, are called “childchains”. Ardor beta release took place in February 2017.
Another well-known representative of the cryptocurrency industry researching the technology is the Lisk project.