A sidechain is a mechanism that allows you to move a distributed ledger’s native asset to a completely different distributed ledger and back again. Sidechains are also known as “child chains”.
You may be familiar with a one-way peg, such as Counterparty (XCP), where bitcoins are sent to an address to be “burned” and you receive a certain amount of XCP.
Essentially, sidechains extend this idea further, providing a two-way peg allowing you can lock bitcoins and move them back and forth and operates independently. A Bitcoin sidechain would create a bitcoin token for each bitcoin you locked up. Entries from the parent chain can be recorded onto the sidechain.
You can transfer these bitcoin tokens to someone, and when they want to get the bitcoins back, they can provide a cryptographic proof that they destroyed the tokens and unlock the bitcoins. Because the token and bitcoin are pegged, they can be freely exchanged with each other.
Sidechains were introduced as an idea to alleviate concerns around scaling Bitcoin, with one of the first formal explanations given by Blockstream. In their current state, sidechains for Bitcoin involve trade-offs with respect to decentralisation. While sidechains enable greater scale, they require a federation to be in control of the funds - increasing centralisation.
Two of the most well-known examples of sidechains include:
- Blockstream’s Liquid: Liquid Bitcoin (L-BTC) is used as a pegged assets to move funds between exchanges. Once L-BTC has been transferred, the receiver can convert to BTC. A federation of bitcoin exchanges, traders and other financial institutions control the funds on the Liquid sidechain.
- Rootstock (RSK): an open source smart contract platform that is merged mined with Bitcoin, meaning bitcoin miners are securing the Rootstock sidechain as well. RSK can scale to 100 transactions per second. As well as scaling and smart contracts, Rootstock hopes to enable faster payments using bitcoin.
A related concept is Drivechain, originally suggested by Paul Sztorc, which would put miners in control of the funds on the sidechain.