First, there two concepts that you should understand here: main chain and sidechain (can also be referred to as childchains.). Think of the main chain as a highway where vehicles can travel, and sidechains as a series of roads built adjacent to the highway (cars can go faster here), and they can link to the highway when necessary.
So, sidechains should simply be understood as a discrete Blockchain that is linked to the main Blockchain via two-way pegs. The functionality of side chains holds significant potential for the enrichment of the capabilities of existing Blockchains.
The two-way pegs enable assets to be interchanged between the parent Blockchain and the sidechain; for instance, using Bitcoin as the underlying asset for a separate Blockchain.
The rate at which these assets are exchanged between the main Blockchain and the childchain is usually predetermined.
How do sidechains work?
To use a sidechain, a user on the parent chain has to send their funds to an output address. Once the coins are in the output address, they are locked. This means that the user is no longer able to use the coins anywhere else.
As a measure to ensure increased security, communication is sent across the main chain and sidechain and a waiting period is allowed after the user’s funds have been moved to the output address. When the waiting period is over, a corresponding amount of coins is released on the side chain. The user is then able to spend the coins on the sidechain.
When moving from the side chain to the parent chain, the user sends the coins from the sidechain to an output address where they are locked. After the waiting period is over an equivalent amount of coins is transferred to the parent Blockchain.
The Underlying Technology
A federation is a group of servers that act as an in-between point between the main chain and a sidechain. The Federation decides when the user’s coins are locked as well as when they are released. The developers of the sidechains can choose the members of the federation. The downside to using federations is that they add another layer between the sidechains and the parent chain.
The good thing about sidechains is that they are independent of their main chain. Sidechains take care of their own security. Problems occurring on the sidechain can, therefore, be controlled without affecting the main chain. Likewise, a security problem on the main chain does not affect the sidechain although the value of the peg is greatly reduced.
Sidechains require to have their own miners. Miners can be given incentives through merged mining (where two different cryptocurrencies with the same algorithm are mined at the same time).
Advantages of sidechains
- The first advantage they have is that they are permanent. You do not have to create a new sidechain every time you need to use one. Once a side chain is built, it is maintained and can be used by anyone doing a specified task off the main chain.
- The other advantage of sidechains is that they allow interaction between different cryptocurrencies. Developers get the opportunity to test software upgrades as well as beta coin releases before they are released on the main chain.
Disadvantages of sidechains
- The first disadvantage is that miners are needed to ensure the safety of the sidechains. This makes the formation of new sidechains a costly venture. Hefty amounts of investments have to be made before any new sidechain can be created.
- Another disadvantage of sidechains is the requirement of a federation. The extra layer formed by the federation could prove to be a weak point for attackers.
To scale blockchain, sidechain or childchain solutions cannot be undermined. Sidechains are separate blockchains that are linked to the main blockchain using a two-way peg. They are an auxiliary network that executes the complementary function of: faster transactions, lower transaction costs and greater scalability in terms of the number of transactions that can be supported in a network at a given time.