Blockchain Sidechains Explained: What is a Sidechain?

What is a sidechain?

A sidechain is a separate blockchain network running in parallel to the main blockchain. It connects with the main blockchain via a two-way peg. The digital asset transfer between blockchains is validated and ensured by the use of smart contracts. The primary goal of sidechains is to speed up the blockchain mainnet.

Enabled by smart contracts, funds on the sidechain and the main chain (Ethereum) are ensured without fraudulent acts. Furthermore, connecting blockchains increases interoperability. Therefore, many blockchains exist instead of only one blockchain.

A sidechain can establish new block parameters and have its own consensus mechanism like Proof-of-Stake or Proof-of-Work, depending on the development purpose.

For example, Ethereum is a Proof-of-Work blockchain and a sidechain called Polygon PoS uses the Proof-of-Stake consensus. The use of sidechains increases the overall performance of the main blockchain in terms of scalability and interoperability.

How does a blockchain sidechain work?

A sidechain is a completely independent blockchain connecting to other blockchains. Thus, it can have a new blockchain architecture with different parameters. In this section, we will discuss how a sidechain works with the blockchain mainnet.

The digital assets on the main blockchain are “transferred” to the sidechain using smart contracts. The token is locked in smart contracts of the main blockchain and the sidechain will mint the equivalent amount for usage. To redeem the token on the main blockchain, users have to deposit back the token on the sidechain. This process is called a two-way peg.

Communication using smart contracts between blockchains and sidechains at scale enhances interoperability. The user experience will be improved drastically if cross-chain communication is realized.

Blockchain Sidechain Projects

Polygon PoS

Polygon PoS (Polygon Proof-of-Stake) is an EVM-compatible sidechain that is one of the solutions developed by Polygon’s 4-co-founders team.

Polygon users can use MATIC token to pay for transaction fees and on-chain activities since it is the native token of Polygon PoS. Other than Polygon PoS, the team is developing many scaling solutions with different architectures such as Polygon Zero (zkRollup), Polygon Nightfall (privacy), etc.

Notable features and numbers, updated on July 7, 2021:

• Transaction speed: Up to 7,000 tx/s
• Low transaction cost thanks to the PoS consensus: Around $0.002 per transaction.
• Validators: 100
• EVM compatibility
• Composability allows dApp legos to be attached together.

Ronin (RON)

Ronin is the Ethereum-connected sidechain developed by Sky Mavis, the company behind the NFT-based game phenomenon Axie Infinity. Despite the success of the NFT game, the sidechain’s funds got hacked in March 2022 due to an exploit. The damage was around $540M at the time.

SKALE (SKL)

SKALE (SKL) is an elastic PoS sidechain for Ethereum that is open-source and configurable. The main goal of SKALE is to reduce the transaction cost and increase the throughput of the Ethereum network. The SKALE team claimed that the sidechain can run a machine learning algorithm using EVM to optimize the total throughput.

Gnosis Chain (formerly xDAI Chain)

Gnosis Chain, formerly xDAI, is an Ethereum-based sidechain using the Proof-of-Stake consensus, focusing on a stablecoin named xDAI. It went live in late 2018, and it empowers Ethereum with fast and cheap transactions.

Loom Network (LOOM)

Loom Network is an Ethereum-based sidechain that uses the Delegated Proof-of-Stake (DPoS) consensus. It can bring scalability for dApps, acting as an execution layer on top of many top-notch blockchains such as Bitcoin, BSC, and Ethereum.

Loom Network has a core which is a PlasmaChain connected with other Sidechains. By doing this, it accumulates the total performance of numerous sidechains with high scalability. The PlasmaChain connects with Bitcoin and Ethereum to communicate via two-way pegs.

Advantages of Sidechain

EVM compatibility

A sidechain is basically a new blockchain that does not depend on the main blockchain. It can be equipped with an EVM-compatible feature to run Solidity code which is a popular smart contract language in crypto. As a result, dApps written in Solidity can run natively on EVM-compatible sidechains.

For example, Uniswap or SushiSwap can easily migrate to sidechains without major changes in the code base. Other developers can also fork those projects to create new ones using Solidity.

Different consensus

This is a big plus for a sidechain since developers are able to implement the latest consensus to eliminate old-fashioned ones’ drawbacks such as energy consumption. Using appropriate consensus is the key for blockchains and sidechains to reach their full potential.

For example, Ethereum is using the PoW consensus, and its sidechain xDAI (now Gnosis Chain) uses PoS to validate transactions faster.

Application specification

It took a few years for the developer team to build Ethereum to be the first smart contract platform. The vision of Vitalik Buterin was so big with Ethereum that he wanted the blockchain to become a kingdom of dApps. It will be a simpler story for sidechains because it might take less time to complete a blockchain for one or a few applications instead of becoming a platform.

For example, Gnosis Chain (formerly xDAI Chain), a sidechain on Ethereum, used to be a derivative of DAI, a crypto-backed stablecoin of MakerDAO. xDAI Chain used xDAI as a stablecoin and STAKE as the native token used for network fee payment.

Disadvantages of Sidechain

Besides the good points, sidechains also have drawbacks that developer teams should consider before starting to make plans.

Data unavailability

Sidechains are different blockchains from the main ones and they are connected via two-way pegs with the use of smart contracts. Therefore, the sidechains do not post any block data (transactions or block states) to the mainnet. This creates vulnerabilities and data fragmentation between sidechains and the blockchain mainnet.

Uninherited security

At the moment, Bitcoin and Ethereum are almost immune to attacks since they have thousands of Proof-of-work blockchain nodes all around the world. A sidechain can bring scalability to those blockchains but it does not inherit the security and the level of decentralization.

As mentioned above, a sidechain is a separate blockchain that can use different consensus and block parameters. It actually owns no nodes of the main blockchain so the blockchain security is separated.

Independent security can make the Ethereum network safe when the connected sidechains are being attacked. However, as retail investors, we might be hesitant to keep our crypto assets on those sidechains because they are vulnerable to attacks.

Although the Ethereum network sometimes faces congestion due to being overloaded, it is still operating without any failed blocks. Therefore, developer teams should consider scaling solutions that inherit the strong security of Ethereum, such as Rollups.

Future of Blockchain Sidechains

Ethereum 2.0 with the Merge will be on the table in the next few years, but Layer 2 scaling solutions on Ethereum are the key to hot fixing the Ethereum network. They have been drawing lots of eyeballs since Ethereum’s recent congestion. How can sidechains take any proportions of the scalability cake? What is the future for sidechains?

Scaling solutions can be divided into 5 major categories based on architectures: Sidechain, State Channel, Plasma, Rollup (Optimistic and Zero-knowledge), and Validum. At the moment, layer 2s using rollups seem to stand out in terms of the project number.

Despite being early, the chance for sidechains to turn over the table is slime because they essentially have limitations which are security and data unavailability. These drawbacks make sidechains unfavorable scaling solutions to others using rollups or validium.

FAQs about Sidechains

Is a Sidechain EVM-compatible?

A sidechain can have its own consensus and be equipped with the latest features, depending on the developer team. Currently, most sidechains are connected with the Ethereum network which contains the most EVMs. Therefore, those Ethereum-based sidechains are EVM-compatible.

Does Ethereum have sidechains?

Ethereum is on the journey to Ethereum 2.0. It has shard chains as sidechains to increase the overall throughput. Other sidechains like Polygon PoS, Gnosis Chain, SKALE, and so on are developed by other teams, not the developer team of Ethereum.

Conclusion

The goal of sidechains is to scale the main blockchain like Bitcoin or Ethereum. They can increase the throughput multiple times with cheaper transaction fees. However, there are other scaling solutions that can eliminate the sidechains’ drawbacks. The race of Layer 2s is yet to have winners, which bolsters the chance of sidechains.