What Is a Sidechain?

By Lipsa Das

What do you do when you’re stuck in traffic along a highway? You wish there was a way to escape it, right? And if there’s a side street or a service road you could take to beat the traffic. Things become much easier.

Major blockchains like Bitcoin and Ethereum are much like highways — they tend to become congested and slow down when there’s a lot of traffic. Sidechains, much like service roads, run alongside the main highway (the parent blockchain) and give you a different route — one that doesn’t involve sitting in traffic for hours. Therefore, sidechains essentially help in blockchain scaling.

In this article, Ledger Academy will unpack what is a sidechain, how it works, and the major sidechain implementations. This article will also compare sidechains vs. Layer 2 solutions to help you understand the key differences and similarities between the two.

Let’s get started.

What Is a Sidechain?

Sidechains are independent blockchains that connect to their parent chains via a two-way bridge. This bridge allows the transfer of assets between the two. 

These sidechains have some sovereignty, as they operate using their own consensus mechanism. This means even if the sidechain has a security breach, the mainnet will remain secure. The primary purpose of the sidechain is simple — to help scale the parent blockchain. Although that can sound a lot like Layer 2 blockchains, sidechains have some fundamental differences.

Sidechain Use Cases: Why We Need Them

Sidechains directly contribute to improving the efficiency of the mainnet. Here’s why sidechains are critical to the entire ecosystem:

Scalability

Sidechains are built to tackle the issue of blockchain scalability. Sidechains operate separately from the main blockchain, so they can process blockchain transactions more quickly and efficiently. This, in turn, makes the parent blockchain faster and cheaper to use. 

Flexibility

Sidechains offer more flexibility to developers than the main blockchain. Developers can experiment with new applications and features on a sidechain without risking the security or stability of the mainnet. Further, these tests are significantly cheaper because sidechains have lower congestion.

Upgradability

Sidechains are highly upgradeable. Developers can easily modify and upgrade the features and functionality of a sidechain, without affecting the main blockchain. Besides, developers can also test network upgrades on sidechains to avoid introducing bugs in the main chain. 

Functionality

Sidechains can be used to build and test new decentralized applications (dApps) unsupported by the parent network. Bitcoin, for instance, does not support smart contracts, yet a sidechain can help developers build dApps. The dApps could be anything from new payment systems to digital identity solutions. So, sidechains can add more functionality to a parent blockchain. 

How do Sidechains Work?

So how do sidechains work together with the main chain? Simply, users transfer their funds into a smart contract on the main chain and receive the same amount of tokens issued on the sidechain. To do so, they use a blockchain bridge.

Blockchain Bridges: Facilitating the Connection to the Sidechain

For the full details, read the Ledger Academy article on blockchain bridges, but essentially, when you send funds to a sidechain via a bridge, assets do not really move from the sidechain and the parent chain or vice versa. It’s basically an imaginary transfer. 

Instead, when you transfer assets to the output address, they will stay locked up on the main blockchain.  After a brief waiting period for security, you will receive new assets to represent them on the sidechain. When you’re done using the sidechain, you can “transfer” the assets back using the bridge again. Doing so destroys the equivalent amount of cryptocurrency on the sidechain and unlocks the cryptocurrency on the main blockchain. Thus assets on a sidechain are merely pegged to those on the parent chain.

For example, if you want to use ETH on the polygon network, you would have to use its native bridge. The bridge locks up your funds in a smart contract on the Ethereum mainnet and issues an equivalent on Polygon. Once you receive the ETH on Polygon, You can then directly make transactions on the Polygon blockchain — like buying the NFT you want or sending ETH to a friend, with cheaper gas fees. Then if you want to transfer it back to the main chain, that’s also possible using the bridge once again. 

So how do these blockchain bridges and sidechains work together? 

Simply, it maintains this connection via two-way pegs and smart contracts. 

Two-way Pegs

A two-way peg enables a seamless transfer of cryptocurrency between the main blockchain and the sidechain while maintaining a consistent value between the two. It’s called a “two-way” peg because the connection can go both ways — from the main blockchain to the sidechain and back again. 

Smart Contracts

Since there is no real transfer of assets between the sidechain and main chain, something must facilitate the connection to maintain the two-way peg. That’s the job of a smart contract.  So, when you send your assets to the output address, it notifies the smart contract on the sidechain, which creates an equivalent number of assets.

The process works in reverse when you want to move assets back to the main blockchain. The smart contract on the sidechain receives the withdrawal request and destroys the equivalent amount of assets on the sidechain. This, in turn, unlocks the equivalent amount of assets on the main blockchain, allowing you to withdraw them from the output address.

Basically, smart contracts automate the process and secure the movement of assets between the sidechain and the main chain. This ensures that only the exact amount of assets you lock up on the main chain shows up on the sidechain and vice versa. 

However, the nature of these smart contracts also poses a risk. If there is something wrong with the smart contract code, bad actors can exploit the weakness, potentially stealing millions. This is exactly what happened with the blockchain bridge used for the Ronin sidechain, and many other bridges before it. That’s because these smart contracts represent a single point of failure. The whole sidechain’s existence relies on the bridge’s strength.

Sidechain vs. Layer 2 blockchain: What’s the Difference?

Sidechains and Layer 2 blockchains both address the same problem — blockchain scaling. But Layer 2 blockchains are built on top of the Layer 1 blockchain. In comparison, sidechains are separate independent blockchains with their own consensus mechanisms and their own native tokens. 

This basically means that Layer 2 blockchains rely on the main chain’s security. But sidechains have their own security mechanism. 

Sidechains can also be used as a testing ground for developers. They can use sidechains to enable new functionality or features not available on the main blockchain, such as privacy, faster transaction times, or more complex smart contracts.

Examples of Sidechain Implementation in Popular Blockchain Projects

Sidechains are already pretty popular — and major blockchains like Bitcoin and Ethereum depend on them to help scale their blockchains. Let’s look at some of the most widely used sidechains, some of which have transaction volumes equal to smaller layer one blockchains!

Polygon: An Ethereum Sidechain

Polygon was launched in 2017 as an Ethereum sidechain known as Matic Network, with MATIC as its native token. However, after rebranding as Polygon in 2021, it also evolved to include some Layer 2 characteristics. The designers developed it as a solution to Ethereum’s high fees and scalability issues. Further, you can seamlessly transfer Ethereum dApps to the Polygon network because they both use the Ethereum Virtual Machine (EVM).

Polygon has gained immense popularity over the years, raking in well-known partnerships. For instance, Starbucks is using Polygon for its loyalty program. 

Rootstock for Bitcoin Smart Contracts

Rootstock, also known as RSK, is a sidechain for the Bitcoin network that started in 2016. It allows for creating smart contracts and decentralized applications (dApps) using the Bitcoin blockchain, which traditionally doesn’t have those capabilities. 

RSK locks Bitcoin on the mainnet and releases smart Bitcoin or SBTC, the native currency of the RSK sidechain. That means you don’t have to convert your BTC into another asset to use smart contracts. And this brings Bitcoin closer to the functionality of Ethereum.

Gnosis Chain

Gnosis claims to be one of the first Ethereum sidechains. xDAI is the native currency to pay for smart contract execution and gas fees. Gnosis is used by POAP, the proof of attendance protocol, which allows you to collect NFT badges at events to prove you attended.   

How to Access Sidechains 

Excited to dive deep into the world of sidechains? Sidechains, especially the popular ones, are entirely accessible; you just need to find a compatible wallet.

However, don’t JUST choose one that is compatible; choose one that can protect you throughout your sidechain journey. For example, if you lose your assets on the sidechain, you can’t redeem them on the main blockchain. Since sidechains are less secure than the main blockchain, you should choose a hardware wallet like Ledger to protect your assets.

Ledger’s devices offer you the perfect blend of security and sidechain accessibility and are compatible with many sidechain coins like MATIC and xDAI. You can easily store and move these assets using your Ledger wallet.

Secure both your sidechain and mainnet assets with your trusted Ledger.