Maintaining records and transactions will become more trustworthy in the future, thanks to the fast rise of the disruptive technology known as the blockchain. Using this technology, you can save confirmed tamperproof data anywhere in the globe at any time. For the most part, it’s a reliable, immutable database that may be used to resolve disputes, authenticate transactions, verify ownership, and do other related tasks.
Blockchain technology holds immense potential, but it has yet to scale to the point where it can dominate global markets. It has been unable to develop due to the inherent limits of the technology. The most significant difficulty with blockchain right now is the speed with which transactions can be executed and the limitations of blockchain scalability.
Blockchain transaction verification is a time-consuming and computationally complex procedure. Nonetheless, these mechanisms play an important role in distinguishing blockchain transactions from standard transactions. Because of these speed constraints, blockchain technology has not wholly merged with faster mainstream activities. The Bitcoin Blockchain can only handle five transactions per second (TPS), but Ethereum can handle up to 15 TPS. On the other hand, Visa has a processing capacity of up to 24,000 TPS.
This fueled a desire to fix the issue as quickly as possible, as scalability may decide the technology’s future and adoption. Second Layer Blockchain Solutions were developed to accelerate the processing of blockchain transactions.
The blockchain can execute more transactions per day when transactions are divided into sets and stored on a second layer.
They are a second-level framework that is constructed on top of current blockchains. Secondary layer systems operate independently of the leading blockchain and handle sets of transactions (off-chain). This method is crucial for the blockchain’s growth to compete with more traditional payment systems such as Visa and MasterCard.
Types of Second Layer Blockchain Solutions
Second layer blockchain solutions are complex protocols designed to increase the operation of the blockchain. They use cutting-edge algorithms and technology to improve transaction speed, verification, and security. There are primarily two sorts.
- State Channels include, for example, the Bitcoin Lightning Network.
- Polygon, for example, has side chains.
This blog will primarily focus on Sidechains.
What exactly are sidechains?
Sidechains may imply different things to different individuals, depending on who you ask. The notion of a sidechain has a tumultuous history. In layman’s terms, a sidechain is a blockchain that can communicate with another blockchain.
Sidechains are classified into two types: those with two different blockchains and those that are interdependent. To put it another way, if one blockchain is a sidechain of another, both blockchains are equal, and both blockchains will occasionally have their own native coin.
In the second scenario, one sidechain may be called the parent chain, while the other may be termed the dependent or ‘child’ chain. When a parent-child sidechain link exists, the kid chain frequently does not generate any assets of its own. Its assets are instead obtained through transfers from the original network.
Although sidechains can interact in several ways, asset exchange is one of the most prevalent. To do this, a 2-way peg is needed. If you have BTC and want ETH, you may utilize the BTC-ETH pair to exchange BTC for ETH. This is the easiest two-way peg to grasp. Unfortunately, using a centralized exchange demands the employment of an intermediary, which requires fees and introduces third-party risk. There is a more efficient method.
A decentralized 2-way peg is essentially made up of “lockboxes” situated on both the Bitcoin and Ethereum blockchains. Let’s look at a simple, practical scenario to better appreciate how these lockboxes help with asset transfers.
Let’s say you want to transfer one bitcoin from the Bitcoin network to a sidechain. How would you go about it? Before proceeding, you must first send a one-bitcoin transaction to a specified Bitcoin lockbox address. If you have Bitcoin in a lockbox, it indicates that it has been temporarily withdrawn from the total amount of Bitcoins in circulation.
You must also give information about the BTC sidechain address where you want to transmit the money in that transaction. After the transaction has been received by the Bitcoin network and put on the blockchain, the sidechain lockbox releases 1 BTC. It transfers it to the address indicated in the Bitcoin network transaction. Simply perform the opposite of what was just described to send the BTC back.
A 2-way peg, also known as a bridge in the crypto industry, transmits assets from one chain to the next and back again. Assets can be moved and exchanged across bridges.
A bridge can handle BTC-to-BTC transactions, but it can also support BTC-to-ETH transfers if it is built to do so. The design of a bridge can vary greatly. A few examples include Powpegs, SPVs, federated systems, and collateralized systems.
Advantages of Sidechains
- Sidechains provide three primary advantages: scalability, experimentation/upgradability, and diversity.
- On the other hand, a sidechain can deliver faster and cheaper transactions by moving a specific type of transaction to a separate chain using a protocol specifically tailored for that type of transaction. Consequently, the first chain should be less congested, making it speedier and less expensive. Sidechains can also benefit from newer, faster, and more efficient ways.
- Experimentation/upgradability: Upgrading an established blockchain with several stakeholders may be difficult. Building consensus takes time and, in some situations, is impossible. Sidechains allow for forming an informal consensus to test and implement new ideas. Scalability is facilitated in many ways by the ability to experiment and upgrade.
- Diversification: If assets are distributed over many blockchains, more people will access them. DeFi apps that lend or borrow money have access to the holdings of other chains.
Disadvantages of Sidechains
Sidechains are fully responsible for their own security; a sidechain’s security is not dependent on the main chain. This is both beneficial and awful in specific ways. This means that the security of one blockchain does not jeopardize the security of the others. Popular blockchains, like Bitcoin, cannot, on the other hand, provide any kind of security to smaller, less notable blockchains.
Sidechains are also reliant on their own miners. Most blockchains rely on a large community of miners to secure their networks. Because newer chains are less profitable for miners, they must do everything possible to increase their mining environment. However, this is difficult. In parent-child sidechains, the kid chain typically lacks its own native coin, exacerbating the situation. Miners are discouraged since their principal source of revenue is the issue of local currency.
Finally, some users may make assumptions about their assets on one blockchain that turn out wrong when they are transferred to another. If you keep BTC because of Bitcoin’s security and trust model, you can be confident that the security will be weaker, and the trust model will be different if you shift BTC to a sidechain.
Consider Polygon, the most popular sidechain at the moment.
That’s pretty much all there is to sidechains that you need to know to get started. Let’s have a look at the Polygon example. Polygon’s rise over the last few years exemplifies the importance of sidechains in the crypto industry.
Polygon is made up of two types of sidechains. Using the Plasma Ethereum framework, you may establish child chains that can execute transactions before they are finally finished on the Ethereum blockchain. Polygon can be used in conjunction with EVM. It distributes its own native coin, MATIC, using Proof-of-Stake validators. The two 2-way pegs in this system are plasma and Proof-of-Stake validators.
Polygon’s objective is to link several blockchains. Because of Polygon’s EVM compatibility, connecting to other EMV-compatible blockchains like SmartBCH should be easier than connecting to a blockchain like Bitcoin.