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What is a Sidechain?

Updated: Dec 9, 2019

By now, we’ve learned that outright scaling a blockchain through block size increases does not come cheap. The limited size of Bitcoin blocks means that the nodes underpinning the network can be run on low-spec hardware and that users can easily verify the integrity of transactions. An increase would drive up the cost of validation, meaning that many nodes would be unable to keep up with the network – thus harming its decentralization.

It’s clear that a layered approach is required: a system of ancillary protocols that can interact directly with Bitcoin, so as to allow transactions to occur without congesting the base chain. Perhaps the most popular example of this in recent years was the Lightning Network which leveraged some of Bitcoin’s inherent properties to create payment channels capable of thousands of transactions, requiring only two on-chain events (opening/closing the channels).

Another significant advance on this front are sidechains – as the name may suggest, these are essentially blockchains that run in parallel to a given chain. The idea behind this is that an asset on the native chain can be ‘locked’ on the main chain, before being ‘released’ on the sidechain (or vice-versa).

The main advantage to sidechains is that they’re unconstrained by the limitations of their progenitors, and can thus integrate new features to serve various purposes – such as faster throughput mechanisms, different consensus algorithms, additional scripting functionality – without harming the security of the connected protocol.

Let’s say Bitcoin fees are high, but you have many transactions to make. You may opt to transfer, say, 10 BTC into a sidechain with much larger blocks (whether via a 2-way peg maintained by a third party or consortium, or via merged mining). Your BTC would become unusable, while you would receive 10 units of the sidechain’s asset (we’ll call them Side Coins).

From there, you would be free to move those Side Coins however you see fit – paying for services, trading them for other cryptocurrencies, or even burning them for fun. Assuming you spent 8 of these coins when it came time to peg out, you’d receive 2 BTC back.

We’ve seen these systems in play for some time now, with the merge-mined RSK providing developers with a platform to develop smart contracts that are secured by Bitcoin. More recently, Blockstream’s Liquid Network was delivered with a different approach, bringing to life Confidential Transactions, Issued Assets, and 1-minute block intervals.

As you’ll undoubtedly know if you’ve been keeping up with BTSE, we’re one of the launch members of the Liquid Network, and we are incredibly excited to support its ongoing development, both as a scaling solution and as a powerhouse of innovative new features.

We’ve recently integrated both Liquid Bitcoin (L-BTC) and Liquid USDT to allow our users to leverage the capabilities of the latest in sidechain advances for all of their trading needs – get started here!