Sidechain - what is it?

Sidechain is a technology used to scale blockchains by creating a parallel network. The main difference between these algorithms is their two-way binding to the main network.

Sidechains show high efficiency in the speed of transaction validation, which ultimately has a positive effect on the cost of payments. However, due to limited decentralization, there are also certain security problems when using such a system. Today, sidechain is used mainly in the Ethereum and Bitcoin networks.

Principle of operation

Due to the mass popularization of Bitcoin as an alternative means of payment and investment instrument, literally a few years after the introduction of this cryptocurrency system, problems with network scalability began to be noted. At the same time, other cryptocurrency networks were developing in parallel, in which the throughput was initially an order of magnitude higher, and the cost of transactions was lower.

The original concept of a sidechain involves the user sending coins to an output address, which is stored in a locked mode for a while. After the transaction is validated, the money is available for use. Due to this strategy, the risks of double spending are eliminated. After the transfer, the coins are placed on the sidechain and can be returned to the original blockchain similarly.

Safety problems

An important difference between these technologies is that their security systems determine their functionality. At the same time, users are offered limited decentralization, which is necessary for greater scalability. However, this significantly increases the risk of hacking significant community members (for example, miners and validators). A striking example is Ronin.

Each sidechain is independent, so any losses, including reputational ones, remain within this system's framework and do not affect the parent blockchain.