Bitcoin sidechains

Bitcoin sidechains: what they are and how they work

Bitcoin sidechains are defined differently depending on who you ask. The definition of what constitutes a side chain has a long history.

In the most general sense, a Bitcoin sidechain can be described as a blockchain that can interact with another blockchain. There are two basic types of Bitcoin sidechains: those with two independent blockchains and those where one blockchain is dependent on the other.

In the case of the former, both Bitcoin blockchains can be considered as each other’s sidechain, meaning they are the same, and sometimes both blockchains will have their own (separate) native token. As for the latter, one Bitcoin sidechain can be considered as the main chain and the other as the dependent or “child” chain.

Typically, in a parent-child sidechain relationship, the child sidechain does not create its own assets. Instead, it gets the assets from transfers from the main chain.

A necessary pin for “sidechains”

Bitcoin sidechains can interact in many different ways. However, it almost always includes the ability to trade assets between chains. This is accomplished through the use of a two-way jack.

The easiest two-way peg to understand is a centralized exchange, which works like this: You have Bitcoin, but you want Ethereum, so you exchange the former for the latter through the pair between the two.

Bitcoin is a very volatile asset.

Unfortunately, using a centralized exchange requires trusting a central party, something that demands intermediary fees and carries third-party risk. There is a better way. A decentralized two-way peg basically consists of “lockboxes” on both blockchains.

A sidechain example

Let’s look at a simplified example to illustrate how these safe deposit boxes are used to facilitate the transfer of assets from one chain to another. Imagine that you want to transfer a BTC from the Bitcoin network to a sidechain. First, send a transaction for one BTC to a designated lockbox address on the Bitcoin network.

Any Bitcoin that is in the vault is effectively removed from the total Bitcoin supply for the time being. Information about the address of the sidechain you want to send the BTC to is also included in that transaction.

Once the transaction is received by the Bitcoin network and added to the blockchain, the sidechain lockbox releases one BTC and sends it to the address indicated in the Bitcoin network transaction. To return the BTC, I simply reversed these steps.

In cryptography, the system for moving assets from one chain to another and back via a two-way peg is often called a bridge. Bridges are not limited to the transfer of assets; assets can also be traded.

Side Chain Benefits

Sidechains provide three main benefits: scalability, experimentation/upgrading, and diversification.

Bitcoin is the most famous cryptocurrency in the world.

scalability

A sidechain can offer faster and cheaper transactions through many optimizations, for example by moving a certain type of transaction to another chain whose protocol is designed specifically for that type of transaction.

This should clear up the first string, making the first string faster and cheaper as well. Sidechains can also use much faster and newer techniques that are more efficient.

Experimentation and upgradeability

It can be difficult to update an entrenched blockchain with diverse stakeholders. Reaching a consensus can be slow, if not impossible. Sidechains allow you to test and implement new ideas without a broad consensus. This experimentation and upgradeability enables many of the efficiencies that contribute to scalability.

Diversification

Assets from other blockchains can be made accessible to more people. Applications such as loans and DeFi lending can gain access to assets from other chains.

Disadvantages of side chains

Sidechains are responsible for their own safety; the security of a sidechain is not derived from the blockchain with which it is linked. This is both positive and negative.

It means that poor security on a blockchain does not affect the security of the connected blockchain. However, this means that popular blockchains like Bitcoin cannot provide any security strength to smaller, less popular blockchains.

Although it is represented as a physical currency, Bitcoin is a 100% digital asset.

Sidechains require their own miners. A large pool of diverse miners is an important way that most blockchains secure their network.

Newer chains must do everything they can to grow their mining ecosystem, but this can be difficult because newer chains are often less lucrative for miners.

Sidechains can make this worse, because in parent-child sidechains, the childchain typically doesn’t have its own native coin. This acts as a disincentive for miners because their main source of income is the issuance of native coins.

Finally, some people may make assumptions about their assets on one blockchain that are not true when transferred to another. For example, if you hold BTC because of Bitcoin’s security and trust model, it’s virtually guaranteed that if you transfer BTC to a sidechain, the security will be less strong and the trust model will be different.

Three Examples of Side Chains

transmission chain

Known in English as a “Drivechain”, it is an example of the second type of “sidechain” mentioned above: “parent-child”. Bitcoin is the parent and Drivechain is the child, so Drivechain does not issue a native token. Instead, it is based solely on BTC transferred from the Bitcoin network.

Drivechain uses SPV to implement its two-way pegging, which relies on miners to validate transfers. A unique feature of Drivechain is the creation of blind fused mining (BMM), which addresses the issue of sidechains requiring your own miners.

Polygon is a mix of side chain types.

BMM allows a miner on the Bitcoin (parent) blockchain to mine on the Drivechain (child) without running a full Drivechain node, and the miner is paid in BTC.

SmartBCH

SmartBCH is an example of the first type of sidechain: two independent blockchains. SmartBCH is an Ethereum Virtual Machine (EVM) and Web3 compatible sidechain for Bitcoin Cash, but it does not have its own native token.

SmartBCH uses a unique bridge called the SHA-Gate. The transfer from BCH to SmartBCH is handled by full node BCH clients. The transfer from SmartBCH to BCH uses a federation for operation and miners for supervision.

Polygon

It is a mixture of both types of side chains. It uses an Ethereum framework that allows for the creation of secondary chains that can process transactions before periodically finalizing them on the Ethereum blockchain. Polygon supports EVM and issues its own native token, MATIC, via proof-of-stake validators. It has two two-way plugs.

Polygon aims to provide connections between blockchains. Since it supports EVM, connecting to other blockchains that also support EVM, like SmartBCH, should be less challenging than blockchains that don’t, like Bitcoin.

Samuel Edwards
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