Bitcoin Sidechains: What Are They and How do They Work?

Beginner’s Guide / 05.07.2020

So far, Bitcoin is the top contender in the cryptocurrency market, with a net worth of approximately 166.4 billion USD. It has a robust network strengthened by its decentralized nature. Using a peer-to-peer network under cryptographic protocols, it enables the undertaking of transactions globally. 

However, this crypto giant network comes with a few limitations that sidechains help solve. Some of these limitations are slow transactions per second, higher transaction costs, scalability issues, and slow evolution of the network compared to traditional transactions with fiat currency. Thanks to sidechains on top of the Bitcoin network, we can put some of these problems to rest.

What are Sidechains?

To have a better understanding of what this article will entail, let us define what sidechains are. You can think of it as two parallel lines. In this case, the main Bitcoin blockchain and another blockchain (the sidechain). You can transfer tokens and assets from the main blockchain to the sidechain and back if needed. Sidechains act as branches of the main blockchain rendering them more efficient.

Sidechain ideas have been around since the end of 2013. Safe to say, they are a crucial development to the evolution of blockchain technology. First, it is essential to note that sidechains are independent of the main blockchain. Nonetheless, they can interact with the main blockchain through two-way pegging without third parties. The process depends on the exchange rates of the parent Bitcoin blockchain.

How Do Sidechains Work?

Here is a simple explanation of how sidechains work. For starters, there is the leading chain from where you transfer the funds from. As a user, you must have an output address to transfer the funds to temporarily. Afterward, the funds are unusable while in this address. Confirmation of the transfer travels through the chains with a waiting period. The waiting period is to ensure additional security of the transfer. 

At the end of the waiting period, the same number of coins sent from the main blockchain is what you get in the sidechain. Now, you can freely use the coins in the sidechain. The vice versa happens if you want to transfer funds from the sidechain to the main blockchain. 

Federations are the intermediaries between the main blockchain and sidechains. They decide when to lock and release the user’s coins. It is up to the sidechain’s designer to choose who/what is in the federation. A downside to having federations is that they add an extra layer between the main blockchain and the sidechains, bringing about centralization possibilities. 

As they are independent, sidechains are liable for their security and depend on their miners. Without ample mining, they are prone to hacking. If this happens, any compromise that occurs to the sidechain does not affect the main blockchain. Likewise, a compromise to the parent blockchain does not affect the sidechain though, the functionality of its merging to the main chain lowers. 

Bitcoin Sidechains

  • Liquid

Liquid is a Bitcoin sidechain that speeds up Bitcoin transactions and enables the digital asset proceeds. The launch of the network happened in October 2018. Liquid transactions in the past were available to anyone. Later, the network introduced confidential transactions to secure information exchange and trading. 

For digital asset proceeds, Liquid allows for the issuance of cryptocurrencies by anyone. It varies from digital collectibles, altcoins to assets. It also supports creating security tokens for tradable financial instruments. Furthermore, it provides the essentials for creation. 

The network has a functionary that acts as the block signer and guard. A block verification in the network requires two-thirds of block signers’ acceptance. In terms of the guard, it ensures the security and management of the network’s coins. 

Coins transferred to the Liquid sidechain become Liquid Bitcoin. The transfer of Bitcoin to the Liquid network is peg-in. As the Liquid user, you send Bitcoin from the main blockchain to a peg-in address. After that, you wait for 102 confirmations, freezing the Bitcoin wallet and activating the Liquid Bitcoin wallet. The reverse process is peg-out, and vice versa happens. 

  • Rootstock

Rootstock is a Bitcoin sidechain that enables smart contracts, which improves Bitcoin’s main blockchain. Rootstock developed from QixCoin, a Turing complete cryptocurrency, where the latter came into existence in 2013. Rootstock itself was launched in 2017. Rootstock uses Smart Bitcoin for the network, which engages both smart contracts and dApps. With a two-way function, Rootstock can reward miners and have a platform for smart contracts.

Like in every other sidechain, once a user transfers currency from Bitcoin’s main blockchain, they receive the same amount as Smart Bitcoin in the Rootstock sidechain. It offers no transaction fees for these processes. 

Rootstock allows for flexibility lacking in Bitcoin, supporting Bitcoin transactions through Smart Bitcoin, faster transactions, fast transaction confirmations, smart contracts, and secure exchange. All these features come with no risk of decentralization of the sidechain. 

  • Hivemind

Hivemind, previously Truthcoin, is a peer-to-peer protocol for the prediction market. Targeting governance, Hivemind settles issues arising from differential policymaking. It aims to make different groups come into an agreement regarding opinions through voting. Moreover, another objective is to ensure the availability of adequate statistics in the prediction market. It comes in handy in a variety of sectors on and outside the Internet. 

Hivemind features voting to eliminate multi-factor decision-making to consensus, providing rich information at low fees and prevention information manipulation by other parties. 

Hivemind creates a platform for users to trade probabilities of future events in the prediction market. Inclusive is an endless variety of factors to trade on different dimensions. Analysis of the outcomes occurs, and a final decision is reached. The decision helps in the generation of algorithms that reflect the market state. 

The network utilizes merge-mining with Bitcoin boosting the Bitcoin network. 

Benefits of Sidechains

  • Increase Flexibility

Sidechains are enabling Bitcoin in terms of expanding transactions. More transactions per second faster than in the main blockchain provide a reliable platform for Bitcoin users to trade. Sidechains are further providing other features such as smart contracts for users widening the scope of what you can do within the Bitcoin blockchain.

  • Confidentiality

Most Bitcoin users find the availability of their transactions to everyone a disadvantage. For those who want more privacy of that information, sidechains like Liquid are providing a policy that ensures private transactions

  • Efficiency

Sidechains are enabling large transactions of both currency and assets. Sidechains eliminate limitations that may come with the main Bitcoin blockchain in the transfer of funds and assets. The heightening of the Bitcoin system is thus, nigh. Furthermore, the low transaction rates that come with the sidechains are more inviting and affordable for users.

Author’s Note

As much as the Bitcoin network is reliable, it comes with a few discrepancies. The development of sidechains is a welcome introduction to the blockchain party. With extensive features offered by sidechains, the Bitcoin and cryptocurrencies’ networks at large will gain significantly. 

For lower transaction fees and higher transaction rates, users gain a reliable platform for trade and more. Best to say, sidechains are revolutionizing the crypto world as much as some may conclude it as a long shot.  

Wayne is a Blockchain enthusiast and expert in crypto trading. Currently, he covers trendy issues on digital currencies.