Sidechains are blockchains that hold and transfer information from the main blockchain.
Sidechains can enable the parent blockchain to function with greater efficiency and privacy. They can facilitate smart contracts and other mechanisms like the Lightning Network, and they offer a secure means to test and develop future blockchain innovations. In easily congested blockchain systems, sidechains provide possibilities for solving crucial scalability issues.
How Do Sidechains Work?
A sidechain uses a two-way peg connecting it to the parent blockchain, allowing information to go between the sidechain and parent. This peg receives coin payments from the main chain to an output address and locks the coins, so they can only be in use on the sidechain.
A group of intermediary servers called a federation determines when to lock and release a user’s coins between the sidechain and parent chain. While providing an extra facet of security, federations add an extra step between the main chain and sidechain. Federations also arguably centralize the use of sidechains, since a select few are responsible to monitor coin usage and authorize transactions.
Sidechains are required to have their own miners, which can be seen as a distinct disadvantage. Wealth is not created on a sidechain, so incentives for miners can be less appealing unless they’re offered hefty rewards from outside investor funding.
However, miners can be given incentives through merged mining––the simultaneous mining of two cryptocurrencies based on the same algorithm.
Sidechains allow the blockchain to be protected while testing key innovations and beta releases. For example, instead of testing new software on the main bitcoin blockchain, developers can utilize sidechains for testing. If a project malfunctions, the effects are isolated to a sidechain, rather than wreaking havoc on the main chain.
Sidechains can be theoretically used to store and transfer several different kinds of digital assets, including Altcoins and banking security.
As blockchain technology broadens its scope, sidechains will have the opportunity to speed up transaction time and create a more streamlined overall experience.