The Role of Sidechains in Blockchain Networks

One of the key concepts in the evolution of blockchain technology is the blockchain sidechain. Sidechains are essentially independent blockchains that run in a specific blockchain's ecosystem, and they play a number of vital roles, with increasing blockchain scalability being one of the main ones. This article will help you gain a better understanding of sidechains and their role in scaling blockchain networks, which is a very sought-after feature in the modern blockchain industry.

What Are Sidechains?

Sidechains are blockchains that run alongside a larger blockchain, often referred to as primary blockchain or mainchain. They are connected to it through blockchain bridges, but they are mostly independent, featuring their own sidechain technology, security, tokens, smart contracts, validators, and alike. In fact, they can exist as entirely separate ecosystems, but they do have ties to the main blockchain.

One example of this is Polygon, which is a sidechain of Ethereum created to resolve scalability issues by processing transactions independently, thus reducing waiting times and fees on the main network. However, sidechains can serve many purposes - from providing improved technology while remaining in the same ecosystem to acting as testing grounds for new blockchain advancements before they are implemented on the mainchain.

Key Features of Sidechains

Sidechains have several key features, such as the following:

Scalability and transaction efficiency. Since the blockchain efficiency of older chains is often found lacking in the modern crypto industry, blockchain side chain might be launched to try and help out. Sidechains are typically designed to handle high volumes and transactions which are processed separately from the mainchain. This makes them a good option for launching dApps that require high throughput, but also things like blockchain gaming, blockchain DeFi, and more.

Enhanced privacy. Blockchain privacy is another key feature of sidechains as they can double down on privacy-focused features. They can add shielded transactions, special confidential smart contracts, and similar blockchain solutions, which ultimately increase privacy without disrupting transparency.

Compatibility with multiple blockchains. With the crypto industry now seeking to establish and grow Web3, blockchain interoperability is one of the most desired features among blockchains. This is why many new sidechains are being designed to be blockchains from cross-chain transactions. For example, Solana network's new project Solaxy (SOLX) will act as a bridge between SOL and Ethereum ecosystems, while being faster and more scalable than either of them.

How Do Sidechains Work?

In order to perform their functions, sidechains have to communicate with the mainchain, and this is done through something called a two-way peg mechanism. Because of it, data is free to flow between the chains while their state and value remain unchanged.

If you wanted to transfer an asset from the main blockchain to the sidechain, the process would lock the desired tokens on the mainchain, and the corresponding amount would be minted on the sidechain. The user would be free to do with the tokens whatever they wanted within the sidechain's ecosystem. When transferring funds back to the mainchain, the sidechain tokens would get burned, and the mainchain would release the originally locked tokens.

Smart contracts play a crucial role in this communication, being used for locking up initial assets, verifying transactions, minting new tokens on the sidechain, and ensuring that the two-way peg mechanism continues to operate accurately.

Components

To perform their functions, sidechains use several specific components: pegging mechanisms, smart contracts, and validators.

Pegging mechanisms enable the transfer of data and assets between chains. While two-way pegs allow assets to move back and forth, one-way pegs only permit movement in a single direction — typically used for burning or minting tokens where return transfers aren't needed.

Smart contracts are self-executing programs that handle crucial sidechain operations, including:

• Locking and unlocking assets during transfers between the chains
• Ensuring that the same asset is not active on both chains at the same time
• Performing processes such as minting, burning, and creating assets

Finally, validators maintain and secure the sidechain by verifying transactions and collecting them into blocks. Since sidechains are independent from the mainchain, validators can use different consensus mechanisms that better suit their specific purposes and efficiency goals.

Advantages of Using Sidechains

There are quite a few advantages to using sidechains, but let's focus on the few largest ones.

The first one is reduced congestion on main blockchains. Sidechains are often better at processing transactions than their mainchains. Moving some of those transactions from the mainchain to the sidechain could significantly reduce network congestion, letting the main blockchain become more efficient. For example, Ethereum's network is often clogged with games, dApps, DeFi protocols, NFTs, and countless tokens. Offloading transactions to sidechains helps prevent failed transfers and reduces network congestion.

Next, another advantage is the reduced transaction cost. Transaction costs tend to go up because crypto users pay more to have their transactions processed sooner, creating a cycle of increasing fees. By processing transactions on sidechains, which are much faster and can usually manage transactions before they get crowded, the fees have no reason to skyrocket.

Finally, the third big advantage brings improved flexibility for decentralized applications. Being faster and more scalable, sidechains allow developers to introduce more features into their dApps and experiment with new things that might be too much for the mainchain. They can use different consensus mechanisms and introduce new governance models for specific use cases, encouraging innovation and experimentation in the blockchain space.

Challenges

There are two major challenges that need to be taken into account when dealing with sidechains.

The first is potential vulnerabilities and security risks. While main chains like Ethereum and Solana are typically considered secure due to their overwhelming number of validators, sidechains operate independently with their own smaller validator networks. This reduces security and increases the possibility of successful attacks, including potential collusion among validators. Additionally, bridges connecting sidechains to mainchains have proven vulnerable to external attacks in the past.

The second challenge is the complexity of implementation. Creating and connecting sidechains requires significant technical expertise and resources. The process demands seamless communication between chains, regular maintenance, upgrades, bug fixes, and more — making it a serious technical endeavor rather than a simple plug-and-play solution.

Popular Use Cases For Sidechains

Throughout this article, there were several mentions of different sidechain use cases, which can be split into three main groups — DeFi, Gaming/NFTs, and cross-chain transactions.

Sidechains in DeFi

Sidechains enhance DeFi performance through increased scalability and cheaper transfers, allowing protocols that depend on micro-transactions to operate efficiently. For example, Uniswap v3 operates on Polygon, offering faster and cheaper services than on Ethereum's mainnet.

Sidechains in Gaming and NFT

Speed and low transaction costs make sidechains ideal for crypto gaming and NFT operations, which require constant minor transfers. The Ronin network demonstrates this through Axie Infinity, where numerous in-game processes need fast, cost-effective blockchain interactions. Similarly, Gnosis Chain has become a reliable platform for NFT minting and trading, avoiding Ethereum's high gas fees.

Sidechains for Cross-Chain Transactions

Sidechains facilitate interoperability between different blockchains, essential for creating Web3. Bitcoin's Liquid Network exemplifies this by enabling fast and private BTC transactions through L-BTC, a pegged asset that helps bypass Bitcoin's scalability limitations and high fees.

Integration with Layer 2 Solutions

One common misconception is that sidechains and Layer-2 (L2) solutions are the same thing. While both aim to enhance blockchain scalability and efficiency, they are fundamentally different. Sidechains are separate, independent blockchains, while L2 solutions are protocols built on top of the mainchain. Their key differences can be seen in the table below:

Features

Layer-2 Solutions

Sidechains

Consensus Mechanism/Security

L2 Solutions do not have their own consensus mechanism but rely on the mainchain mechanism instead, which also allows them to inherit the mainchain’s security.

Sidechains can use their own consensus mechanism which can be completely different from the one mainchain uses, but this can reduce security.

Fees

Fees are significantly lower as transactions are aggregated and settled on the mainchain.

Speeds are often lower than the mainchain due to greater speed and scalability, but it is not always the case.

Transaction speed

Transaction speed is near-instant thanks to processing off-chain and settling on-chain.

They largely depend on the sidechain’s design but are typically faster than the mainchain.

Interoperability

Highly compatible with the mainchain due to direct integration.

Requires a bridge to the mainchain, which brings additional risks and requires maintenance and technical knowledge to create and maintain.

Examples

Lightning network, Optimistic Rollups

Polygon, Liquid Network, Gnosis Chain

The Potential of Sidechains in Blockchain Networks

Sidechains continue to evolve through ongoing development, innovation, and enhanced performance. They enable main blockchains to branch out into specialized sectors - from NFT-focused chains to those optimized for DeFi, dApps, and gaming. While challenges exist, sidechain adoption is rising as they integrate with both L2 solutions and mainchains, contributing to the development of Web3.

To learn more about blockchain technology and its applications, explore our articles about blockchain wallets and other aspects of the crypto industry.