Key points
- A sidechain is a scaling technique that creates a parallel network with a two-way peg to the main chain.
- It chiefly targets higher throughput and lower transaction costs for assets native to the parent chain.
- The main drawback is weaker security stemming from reduced decentralisation in the sidechain.
- Today sidechains are used mainly with Bitcoin and Ethereum.
How does a sidechain work?
A few years after launch, the Bitcoin network began to hit scalability limits: many crypto projects emerged that offered far higher speeds and much lower transaction fees.
In 2014 developers at Blockstream first outlined the concept of sidechains that could help bypass Bitcoin’s constraints.
They proposed a separate, auxiliary blockchain with a two-way peg to the parent network, allowing assets to move between the two.
Under the original design, a user of the parent blockchain first sends coins to a designated output address. The funds are locked for a short period for checks intended to prevent double-spending.
Once confirmed, the coins are minted or released on the sidechain, where they can be used freely. The holder can likewise return them to the main chain.
Today sidechains are used chiefly with Bitcoin and Ethereum—the two most popular networks, both constrained by limited throughput.
Which Bitcoin sidechains exist?
The best-known Bitcoin-based sidechain is Liquid Network from Blockstream, built on the Elements codebase. Elements itself derives from Bitcoin’s code, but in Liquid the block time is cut from ten minutes to one minute by dialling down decentralisation.
Liquid has no native asset. Instead, it uses a wrapped-like token, L-BTC, issued when bitcoins are moved from the main chain to the sidechain. L-BTC is backed 1:1 by BTC. Liquid also supports confidential transactions.
Even so, Liquid is not as decentralised as Bitcoin. The project is run by a “federation”—a relatively small set of organisations, globally distributed and independent.
They vote on protocol upgrades, operate nodes and manage so‑called “functionaries”. These are keys for a multisignature wallet that requires at least 11 of 15 functionary keys to confirm bitcoin transactions. Each trusted federation member controls one key.
As of 2022 Liquid had not achieved broad adoption in the crypto market and functioned more like a private chain, used by institutional investors, applications and wallets.
A small amount of Tether (USDT) has been issued on Liquid. In early September 2022 it emerged that Blockstream planned to launch XDAX, a decentralised Bitcoin exchange where users could trade Liquid-based assets.
Another notable Bitcoin sidechain is Rootstock, which embeds a virtual machine for smart contracts. In August 2022 WakeUpLabs and Kilimo announced plans to issue non-fungible tokens on Rootstock.
What distinguishes Ethereum sidechains?
Scalability is especially acute for Ethereum. A range of crypto projects pursue different fixes, one of which is sidechains.
Unlike Ethereum, a sidechain can use a different consensus mechanism—such as Byzantine Fault Tolerance, Proof-of-Authority or Delegated Proof-of-Stake (DPoS). More aggressive block parameters typically require trimming the number of full nodes, reducing decentralisation and, with it, security.
A key feature is compatibility with the Ethereum Virtual Machine. Such networks support contracts written in Solidity, making it easy to deploy Ethereum applications on a sidechain.
Which Ethereum sidechains exist?
Several Ethereum sidechains are live today. One is Polygon Proof of Stake (PoS), part of the Polygon ecosystem. Polygon PoS has three layers:
- Bor: responsible for packaging sidechain transactions into new blocks. For added safety, nodes are periodically shuffled via committee mechanisms.
- Heimdall: the Proof-of-Stake consensus layer that validates blocks produced by Bor, aggregates them into a Merkle tree and publishes it to Ethereum mainnet to achieve finality.
- Staking smart contracts.
Polygon PoS offers throughput far above the parent chain. Developers estimate around 7000 Tx/s versus roughly 15 Tx/s on Ethereum. The native token is MATIC.
Assets move from Ethereum to Polygon PoS via a bridge that locks the tokens and releases them on Polygon. A “relay” mechanism governs cross-chain transfers, requiring approval from two-thirds of sidechain validators.
Beyond Polygon PoS, there is Loom Network, a multichain platform for decentralised applications launched in 2017. Loom uses an EVM-compatible base layer called Basechain that runs on DPoS. The native token is LOOM (ERC‑20).
Other Ethereum sidechains include Skale and Gnosis Chain. The team behind the popular blockchain game Axie Infinity runs the Ronin sidechain, linked to Ethereum via a cross-chain bridge that was relaunched in summer 2022 after a major hack. Ronin handles in-game transactions, including NFTs and the SLP and AXS tokens.
How safe are sidechains?
Sidechains rely on their own security. The limited decentralisation used to achieve scalability raises the risk that validators, miners or other key participants are compromised—as happened with Ronin.
Because each sidechain is independent, if it is hacked or compromised the damage is contained within that chain and does not affect the main blockchain. If the main chain were compromised, the sidechain would keep running, but its peg to the parent chain would lose value.
Some Bitcoin sidechains use “merged mining”—simultaneous mining of two separate cryptocurrencies that share the same consensus algorithm.