Sidechains were first proposed in 2014 in an academic paper written by Dr. Adam Black, “Enabling Blockchain Innovations with Pegged Sidechains.” The theory behind sidechains was to create scalability on the larger blockchains like Bitcoin and Ethereum. Some of the most popular sidechains include Loom and Polygon.
How Sidechains Operate
As the biggest blockchains grow and process more transactions the data becomes overbearing on the network leading to a slowdown in transaction speeds. Sidechains work by running alongside the mainchain to bring enhanced features, security, and efficiency.
Along with several other engineers from the early days of Bitcoin, Dr. Black wrote, “We propose a new technology, pegged sidechains, which enables Bitcoin and other ledger assets to be transferred between multiple blockchains. This gives users access to new and innovative cryptocurrency systems using the assets they already own.”
Sidechains are secondary protocols that run their own consensus system but can only work connected to the mainchain via a two-way peg. These networks are designed to maximize transaction speed and security while minimizing additional trust and data transfer on the mainnet. They are often smaller networks that are much faster and more secure, but far less decentralized than the larger main blockchains.
The Two Peg system
The point of sidechains is to efficiently move tokens between blockchains. This is done by using the Two Peg system. The system allows assets to be transferred from the main to the side via a smart contract. The tokens are transferred onto the sidechain by locking the amount transferred mainchain and minting the same value amount on the sidechain. To go back to the mainchain the process is done in reverse according to the terms of the smart contract.
Say a user wants to buy an NFT on Ethereum but processes it using a sidechain. When the user makes the transaction, ETH is locked up and the equivalent token value is created or unlocked on the sidechain and transferred to the user’s wallet. Consumers often use sidechains to limit fees and speed up transactions, especially in the case of Ethereum where the fees are high and the transaction rate can be slow.
Although sidechains have been around for nearly a decade they are still developing as the technology improves and engineers continue to find new use cases.
