530
views

Bitcoin Sidechains: What Are They and How do They Work?

So far, Bitcoin is the top contender in the cryptocurrency market, with a net worth of approximately 166.4 billion USD. It has a robust network strengthened by its decentralized nature. Using a peer-to-peer network under cryptographic protocols, it enables the undertaking of transactions globally. 

However, this crypto giant network comes with a few limitations that sidechains help solve. Some of these limitations are slow transactions per second, higher transaction costs, scalability issues, and slow evolution of the network compared to traditional transactions with fiat currency. Thanks to sidechains on top of the Bitcoin network, we can put some of these problems to rest.

What are Sidechains?

To have a better understanding of what this article will entail, let us define what sidechains are. You can think of it as two parallel lines. In this case, the main Bitcoin blockchain and another blockchain (the sidechain). You can transfer tokens and assets from the main blockchain to the sidechain and back if needed. Sidechains act as branches of the main blockchain rendering them more efficient.

Sidechain ideas have been around since the end of 2013. Safe to say, they are a crucial development to the evolution of blockchain technology. First, it is essential to note that sidechains are independent of the main blockchain. Nonetheless, they can interact with the main blockchain through two-way pegging without third parties. The process depends on the exchange rates of the parent Bitcoin blockchain.

How Do Sidechains Work?

Here is a simple explanation of how sidechains work. For starters, there is the leading chain from where you transfer the funds from. As a user, you must have an output address to transfer the funds to temporarily. Afterward, the funds are unusable while in this address. Confirmation of the transfer travels through the chains with a waiting period. The waiting period is to ensure additional security of the transfer. 

At the end of the waiting period, the same number of coins sent from the main blockchain is what you get in the sidechain. Now, you can freely use the coins in the sidechain. The vice versa happens if you want to transfer funds from the sidechain to the main blockchain. 

Federations are the intermediaries between the main blockchain and sidechains. They decide when to lock and release the user’s coins. It is up to the sidechain’s designer to choose who/what is in the federation. A downside to having federations is that they add an extra layer between the main blockchain and the sidechains, bringing about centralization possibilities. 

As they are independent, sidechains are liable for their security and depend on their miners. Without ample mining, they are prone to hacking. If this happens, any compromise that occurs to the sidechain does not affect the main blockchain. Likewise, a compromise to the parent blockchain does not affect the sidechain though, the functionality of its merging to the main chain lowers. 

Bitcoin Sidechains

  • Liquid

Liquid is a Bitcoin sidechain that speeds up Bitcoin transactions and enables the digital asset proceeds. The launch of the network happened in October 2018. Liquid transactions in the past were available to anyone. Later, the network introduced confidential transactions to secure information exchange and trading. 

For digital asset proceeds, Liquid allows for the issuance of cryptocurrencies by anyone. It varies from digital collectibles, altcoins to assets. It also supports creating security tokens for tradable financial instruments. Furthermore, it provides the essentials for creation. 

The network has a functionary that acts as the block signer and guard. A block verification in the network requires two-thirds of block signers’ acceptance. In terms of the guard, it ensures the security and management of the network’s coins. 

Coins transferred to the Liquid sidechain become Liquid Bitcoin. The transfer of Bitcoin to the Liquid network is peg-in. As the Liquid user, you send Bitcoin from the main blockchain to a peg-in address. After that, you wait for 102 confirmations, freezing the Bitcoin wallet and activating the Liquid Bitcoin wallet. The reverse process is peg-out, and vice versa happens. 

  • Rootstock

Rootstock is a Bitcoin sidechain that enables smart contracts, which improves Bitcoin’s main blockchain. Rootstock developed from QixCoin, a Turing complete cryptocurrency, where the latter came into existence in 2013. Rootstock itself was launched in 2017. Rootstock uses Smart Bitcoin for the network, which engages both smart contracts and dApps. With a two-way function, Rootstock can reward miners and have a platform for smart contracts.

Like in every other sidechain, once a user transfers currency from Bitcoin’s main blockchain, they receive the same amount as Smart Bitcoin in the Rootstock sidechain. It offers no transaction fees for these processes. 

Rootstock allows for flexibility lacking in Bitcoin, supporting Bitcoin transactions through Smart Bitcoin, faster transactions, fast transaction confirmations, smart contracts, and secure exchange. All these features come with no risk of decentralization of the sidechain. 

  • Hivemind

Hivemind, previously Truthcoin, is a peer-to-peer protocol for the prediction market. Targeting governance, Hivemind settles issues arising from differential policymaking. It aims to make different groups come into an agreement regarding opinions through voting. Moreover, another objective is to ensure the availability of adequate statistics in the prediction market. It comes in handy in a variety of sectors on and outside the Internet. 

Hivemind features voting to eliminate multi-factor decision-making to consensus, providing rich information at low fees and prevention information manipulation by other parties. 

Hivemind creates a platform for users to trade probabilities of future events in the prediction market. Inclusive is an endless variety of factors to trade on different dimensions. Analysis of the outcomes occurs, and a final decision is reached. The decision helps in the generation of algorithms that reflect the market state. 

The network utilizes merge-mining with Bitcoin boosting the Bitcoin network. 

Benefits of Sidechains

  • Increase Flexibility

Sidechains are enabling Bitcoin in terms of expanding transactions. More transactions per second faster than in the main blockchain provide a reliable platform for Bitcoin users to trade. Sidechains are further providing other features such as smart contracts for users widening the scope of what you can do within the Bitcoin blockchain.

  • Confidentiality

Most Bitcoin users find the availability of their transactions to everyone a disadvantage. For those who want more privacy of that information, sidechains like Liquid are providing a policy that ensures private transactions

  • Efficiency

Sidechains are enabling large transactions of both currency and assets. Sidechains eliminate limitations that may come with the main Bitcoin blockchain in the transfer of funds and assets. The heightening of the Bitcoin system is thus, nigh. Furthermore, the low transaction rates that come with the sidechains are more inviting and affordable for users.

Author’s Note

As much as the Bitcoin network is reliable, it comes with a few discrepancies. The development of sidechains is a welcome introduction to the blockchain party. With extensive features offered by sidechains, the Bitcoin and cryptocurrencies’ networks at large will gain significantly. 

Bitcoin live price
Btc
Bitcoin
$29.545
price
0.69678%
price change
BUY NOW

For lower transaction fees and higher transaction rates, users gain a reliable platform for trade and more. Best to say, sidechains are revolutionizing the crypto world as much as some may conclude it as a long shot.  

Stay up to date with our latest articles

More posts

Intel’s Blockscale – A New Bitcoin Mining Chip

Earlier this month, Intel announced Blocksale ASIC, the company's second-generation Bitcoin mining chip. Intel plans to deliver the new chip for the third quarter, which it claims will be more energy-efficient. What does this news mean for Intel and the blockchain sector? How will Bitcoin miners react? Intel’s Second Attempt to Attract Crypto Miners Intel's first mining chip, named Bonanza Mine, is a 7nm process packed in lots of 300. We can speak of a 3,600W mining machine with up…

SegWit2x – What is It and How Does It Work?

SegWit2x (“B2X” or “S2X”) was a failed controversial Bitcoin hard fork effort aimed to double the block size limit. Some people in the BTC community went as far as to label this proposal as a “Corporate Takeover”. Over 80% of miners supported SegWit2x, but the community could not agree on the upgrade. There are several things we can all learn from this story, as we will explain in the article. The difference between a “Soft Fork” and a “Hard Fork”…

SegWit (Segregated Witness) – What Is It and How Does It Work?

From Satoshi Nakamoto's historic whitepaper to modern times, the world of cryptocurrencies has changed a lot. This sector has brought about a real revolution in the world economy in just under ten years. Not everyone knows that the algorithm created following Nakamoto's paper has undergone several changes over time. This software (known as "Bitcoin Core") has shown more rigidity than many modern blockchains. For this reason, analyzing one of its significant changes over time is an exciting aspect. Therefore, this…

What Is a Bitcoin Node? A Guide for Beginners

How to evaluate the security of a cryptocurrency? One could easily claim that secure cryptos need to run on a secure blockchain. However, this theoretical statement can have complex applications in the real world. One way to look at the matter is by connecting security to validation. Every blockchain must have a suitable transaction validation mechanism. When it comes to blockchain validation, we generally mention nodes. Today we will talk about Bitcoin nodes. The article aims to explain a very…

Where Can You Pay Taxes With Bitcoin?

Short-term Bitcoin traders have an acute interest in how they can dodge paying taxes on their Bitcoin, especially on capital gains. Others see it as a tool for evading taxation altogether, including income tax. These strategies are usually quite difficult in practice and therefore NOT recommended. However, a more interesting question – relevant to law-abiders and long-term HODLers – is how we can use our Bitcoin to help pay our taxes. Directly. This prospect is essential for people who store…

The Story Of Bitcoin And Ethereum’s Reversed Blockchains

Decentralization is the primary selling point of the three worlds of Bitcoin, crypto, and the web. There are several reasons for this. Some are related to the increased transactional efficiency that decentralization can provide. Others are related to creating permissionless, censorship-resistant digital networks. The most important is that decentralization weakens any single-point-of-failure, hence bolstering network security. This not only keeps a network as close to unbiased and ‘neutral’ as possible but almost guarantees its immutability. Yet the crypto world hasn’t…

What Is A Bitcoin ETF?

On October 19th, 2021, the first Bitcoin US Bitcoin ETF launched on the New York Stock Exchange. This was a long-awaited event for the crypto community, which viewed it as a significant milestone for the industry. The debut was hyper-successful, too. Within just a day, the ETF generated over $800 million in trading volume. It was the second most lucrative stock market debut ever on the NYSE, behind Black Rock’s carbon fund. Why the enthusiasm? What is a Bitcoin ETF,…

Is It Safe to Use Bitcoin Blockchain?

New Bitcoin investors often worry about how safe this technology is. And, since buying BTC could be expensive nowadays, they are not wrong to enquire about crypto safety. After all, their assets are on the line if something goes wrong with the blockchain. Bitcoin is one of the most popular digital forms of money on the planet. It has been around since 2009. For the past 10 years, this virtual currency has demonstrated to be exceptionally strong in ensuring data security.…

Should I Keep My Bitcoin On An Exchange Or In A Wallet?

Cryptocurrency has taken the world by storm. Today, it is unlikely that someone using the internet hasn't at least heard about Bitcoin even once. Such is the popularity of cryptocurrency that many companies and brands accept it as a form of payment. Additionally, dozens of crypto exchanges allow you to buy any cryptocurrency with fiat money. Buying cryptocurrency has become incredibly more accessible, and you can even find guides and articles on how to do so. However, most Bitcoin owners…

What Are the Major Differences between Blockchain and Bitcoin?

Over the years, cryptocurrencies have been a hot topic all around the world. Also, many people invested heavily in digital assets and generated millions of dollars in return. As a result, the crypto industry has developed into a trillion-dollar market. Nevertheless, many people still hesitate to enter the crypto space due to its many confusing terms. For instance, some don't know the differences between blockchain and Bitcoin. And, who can blame them? Bitcoin is a cryptocurrency but also a blockchain.…