What is a sidechain

A sidechain is a secondary blockchain that is linked to the main chain by a two-way peg. A sidechain is a blockchain ledger that operates in parallel to a major blockchain and has a two-way connectivity between the two chains.

Imagine a global decentralized network of numerous blockchains, each with its own set of regulations, that are completely independent of one another yet nevertheless forming a single ecosystem. The sidechain view is as follows. Tokens and other digital assets may easily flow back and forth from the main chain because to this powerful cryptographic technique. The Liquid Network, for example, is a settlement layer that allows traders and trading platforms to enjoy quicker and more private transactions, as well as the generation of digital assets. Only operations involving Bitcoin are feasible since the Liquid Network is tied to Bitcoin, which is the primary chain in this case.

How it works

The main chain user must first transmit coins or other digital assets to an output address, which locks them and prevents them from being spent elsewhere. A confirmation is sent across the chains after the transaction is complete. After then, there is a waiting time for further security. Following that, the coins or assets will be completely moved to the sidechain, allowing users to freely move them across the new network. If a user wishes to return the coins to the main chain, he simply reverses the operation.

Sidechains exist in a variety of shapes and sizes, depending on the functions for which they are designed. While both Liquid and Rootstock are Bitcoin sidechains, they operate in completely different ways, with the latter being designed primarily for running smart contracts more effectively.

The recently established Beacon Chain, which hopes to eventually become the main chain of proof-of-stake (PoS)-based Ethereum, features its own variant of sidechains known as shard chains.

Two-way peg

“The mechanism by which coins are transferred between sidechains […] a pegged sidechain is a sidechain whose assets can be imported from and returned to other chains.” is the definition in a sidechain white paper.

Sidechains were created to make it easier to move digital assets between blockchains, regardless of who owns them. Digital assets should be able to be moved without any counterparty risk, which means that no third party should be able to prevent the asset from being transferred.

A two-way peg is necessary to permit this transmission back and forth across blockchains. Consider it a two-way tunnel with traffic moving in both directions.

Simply put, a two-way peg enables the movement of digital assets like as bitcoin between the mainnet and the new sidechain. Surprisingly, a digital asset is never "transferred." The assets are not really moved; instead, they are locked on the mainnet while the sidechain unlocks the same amount.