What is a sidechain?

A blockchain typically consists of a chain of blocks. This chain is usually called the main chain. It links the individual blocks so that a blockchain is created. In addition, there are the so-called sidechains, which run alongside the main chain. In a way, they are branches of the Mainchain. This means that they can exist relatively autonomously next to the mainchain.

This requires tokens to be “transferred” from the mainchain to the sidechain. After all, it should not be possible to spend them twice. Instead, the tokens are “marked” so that they are no longer (temporarily) processed on the main chain. The sidechain is a black box. This means that many independent transactions can take place in this black box without the entire network noticing. Because this only reads the mainchain and therefore does not see what is happening in the background on the sidechain.

An example of a bank
To explain the principle, let us begin with an example from the banking world that we are all familiar with. A bank offers cash and virtual money in the accounts. If the money moves in the form of a transfer, this transfer is recorded by the bank. So it is visible.

However, it is also possible that we will make a withdrawal of 100€. When we use it to buy products, we pass the cash on to other people who in turn use it for their own purchases. This process happens quite often, so many transactions take place in our imaginary cash system. At the end of our experiment, all participants deposit their cash back at the bank.

This is an interesting phenomenon: The amount of cash has not changed, only the distribution. And although many networked transactions have taken place, in the end the bank only sees the closing balances of our individual persons.

Let’s get back to the blockchain: With a sidechain it’s quite similar, because the tokens are transferred to a sidechain and are therefore in a black box.

What are the advantages of sidechains?
A sidechain can define its own rules. For example, a sidechain can use a different Konses algorithm (e.g. proof-of-work) than the mainchain. This allows flexibility within the network and at the same time the possibility to relieve the mainchain. On the sidechain, transactions within the sidechain can be executed largely independently of the mainchain – not all users will notice this. If a normal bitcoin transaction is sent, it is processed by all participants in the network and thus visible to them. This leads to capacity problems with large transaction volumes. Using a sidechain, on the other hand, would relieve the Bitcoin network.

What types of Bitcoin sidechains are there?

  • Custodian – The Supervisor
    The so-called supervisor (custodian) is a central party that reserves the tokens. The bitcoin is sent to this custodian, who in turn holds it in his possession and ensures that it cannot be output on the mainchain. Disadvantage of this approach is that you trust the custodian to monitor the frozen coins.
  • Federation – The sidechain committee
    Instead of placing trust – as with the custodian – in only one hand, a federation can alternatively be formed. For this purpose, access to the frozen tokens is granted via a multiwallet. This means, for example, that there are three keys. At least two of them are needed to open the treasure chest with the tokens. If you give the keys to three persons (e.g.), two out of three persons must agree in order to release the tokens.
  • SPV Sidechain – The automated inspection
    The sidechain variant described in the official side-chain white paper is a so-called SPV side-chain. This requires so-called SPV proofs (simplified payment verification proofs). The technical term means that it is possible to check whether a transaction is contained in a block based on cryptography with only a few required data. If this condition is met, the token transfer is performed.
  • Drivechain
    In a drivechain, the miners are involved in the decision process for the transfer of the tokens. Strictly speaking, these are the custodians (see above) about the transferred tokens – so they can also release them on the main chain again. The drivechain is based on the idea that, given the game theory, Miner’s monitoring of the funds is less dangerous than using a centralized custodian.
  • hybrid models
    Of course, the individual variants can also be combined – nothing else means the hybrid model of a sidechain. For example, RSK Labs has examined a concept that combines the drivechain idea with a federation. Put simply, this allows both the miners and the individual members of the Federation with their keys to decide on the transfer of the tokens.

Lisk – a sidechain network by nature
Lisk is a project that was developed with a special focus on sidechains and above all wants to use the advantages of capacity relief and the possibility of dApp development off the mainchain. In our Lisk-Tutorial we describe the project in more detail.


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