Bitcoin sidechains: what they are and how they work

So far, Bitcoin is the top player in the crypto market, with a value of about 500 billion US dollars. It has a resilient network strengthened by its decentralized nature. Using a network of peer-to-peer nodes governed by cryptographic rules, it enables transactions on a global scale.

However, this giant cryptocurrency has some limitations that sidechains help solve. Some of these limitations include a low number of transactions per second, higher transaction costs, scalability problems and slow network evolution compared with traditional fiat currency transactions. Thanks to sidechains working alongside the Bitcoin network, we can solve some of these problems.
What are sidechains

To better understand this article, let’s define what sidechains are. You can think of them as two parallel lines: in this case, the main Bitcoin blockchain and another blockchain (the sidechain). You can move tokens and assets from the main blockchain to the sidechain and back again if needed. Sidechains act as branches of the main blockchain, making it more efficient.

Ideas for sidechains have been around since late 2013. We can safely say they are a crucial step in the evolution of blockchain technology. First, it’s important to note that sidechains are independent of the main blockchain. However, they can interact with the main blockchain through a two-way peg, without third parties. The process depends on the exchange rates of the parent Bitcoin blockchain.

How sidechains work

Here is a simple explanation of how sidechains work. First, there’s the main chain you move your funds from. As a user, you need an output address to temporarily transfer the funds to. The funds then stay inactive while they sit at that address. The transfer is confirmed across the chains after a waiting period. The purpose of the waiting period is to add extra security to the transfer.

At the end of the waiting period, the coins sent from the main chain are what you receive on the sidechain. You can now use the coins freely on the sidechain. The reverse happens if you want to move funds from the sidechain back to the main chain.

Federations are the intermediaries between the main chain and the sidechains. They decide when to lock and release a user’s coins. It’s up to the sidechain’s designer to choose who or what is in the federation. One downside of federations is that they add an extra layer between the main chain and the sidechain, with the risk of centralization.

Because they are independent, sidechains are responsible for their own security and depend on miners. Without extensive mining, they are vulnerable to hacking. If that happens, a breach of the sidechain does not affect the main chain. Likewise, a breach of the parent chain does not affect the sidechain through its merge with the main chain.

Bitcoin sidechains

Liquid

Liquid is a Bitcoin sidechain that speeds up Bitcoin transactions and enables the management of digital assets. The network went live in October 2018. At first, transactions on Liquid were visible to everyone. Later, the network introduced confidential transactions to protect the information and transactions being exchanged.

When it comes to managing digital assets, Liquid lets anyone issue tokens, from digital collectibles and altcoins to assets. It also supports the creation of security tokens for tradable financial instruments. On top of that, it provides the functionality needed to create these assets.

The network has functionaries that act as block signers and guards. Validating blocks on the network requires the approval of at least two-thirds of the block signers. As for the guard role, it ensures the security and management of the network’s coins.

Coins moved to the Liquid sidechain become Liquid Bitcoin. Moving bitcoin to the Liquid network is called a peg-in. As a Liquid user, you send bitcoin from the main chain to a peg-in address. You then wait for 102 confirmations, which freezes the Bitcoin wallet and activates the Liquid Bitcoin wallet. The reverse process is called a peg-out, and it works the other way around.

Rootstock (RSK)

Rootstock is a Bitcoin sidechain that enables smart contracts, improving on the Bitcoin main chain. Rootstock was developed from QixCoin, a fully Turing-complete cryptocurrency created in 2013. Rootstock itself launched in 2017. Rootstock uses Smart Bitcoin on its network, which supports smart contracts and third-party applications. Rootstock rewards miners through merged mining and provides a platform for smart contracts.

As with any other sidechain, when users move coins from the Bitcoin main chain, they receive the same amount of Smart Bitcoin on the Rootstock sidechain. As a result, there are no transaction fees for these conversions.

Rootstock offers flexibility that Bitcoin lacks, supporting transactions with Smart Bitcoin, faster transactions, quick transaction confirmations, smart contracts and secure exchange. All of these features come without the risk of decentralizing the sidechain.

Advantages of sidechains
 

More flexibility with sidechains

Sidechains expand Bitcoin’s capabilities when it comes to transactions. More transactions per second than on the main chain give Bitcoin users a reliable platform for transacting. In addition, sidechains offer other features such as smart contracts, broadening the scope of what you can do within the Bitcoin chain.

Sidechain privacy

Most Bitcoin users see the fact that their transactions are visible to everyone as a drawback. For those who want more privacy for their information, sidechains such as Liquid offer a solution that ensures private transactions.

Sidechain capacity

Sidechains allow large transactions in both cryptocurrencies and assets. Sidechains remove the limitations that the main Bitcoin blockchain may impose on moving funds and assets. Strengthening the Bitcoin system is therefore within reach. In addition, the low transaction fees that come with sidechains are more affordable and attractive to users.