What Are Bitcoin Sidechains? A Complete Beginner's Guide | Sovryn (2024)

May 1, 2024

overview

Bitcoin sidechains have emerged as a solution to Bitcoin’s scalability challenges by offloading transactions from the Bitcoin blockchain and providing new use cases for Bitcoin.

Read on to learn about sidechains, how they work, and what they bring to the Bitcoin ecosystem.

A sidechain is a scaling solution that runs parallel to the mainchain. It is independent and separate from the parent chain because it has its own native coin and consensus mechanism. Nevertheless, it is linked to the mainchain, allowing users to transfer assets seamlessly between the two.

Sidechains aim to scale Layer 1 blockchains by offloading transactions to minimize on-chain congestion. In essence, a sidechain acts like a service road that runs parallel to the main highway, giving motorists an alternative route to escape traffic congestion.

They were first described in a 2014 paper by Adam Back and several other authors as the solution to Bitcoin’s problem of limited scalability and utility. Back is the brain behind HashCash, a proof-of-work (PoW) email project that inspired Bitcoin’s consensus algorithm.

Sidechains are characterized by a two-way peg bridge and an independent consensus mechanism.

Here’s a breakdown of the two.

Two-Way Peg

Sidechains use a two-way peg bridge to “move” assets to and from the parent chain. This mechanism links the two chains, allowing them to be interoperable. Asset bridging is facilitated by smart contracts deployed on both the mainchain and the sidechain. Rather than physically moving assets from one chain to another, smart contracts handle the locking and unlocking of corresponding coins on the two chains to transfer value.

When using a two-way bridge, the user first locks their asset (the native coin of the L1) in a smart contract on the mainchain. The smart contract on the sidechain is notified of this action, prompting it to unlock an equivalent amount of the sidechain asset (a coin pegged to the L1 native coin) on the sidechain. These coins are then released to the user’s wallet address. The user can then interact with the sidechain’s dapps. Once ready to move back to the mainchain, the user must send a withdrawal request to the sidechain smart contract. This will trigger it to lock the two-way peg sidechain coin while prompting the mainchain smart contract to release the locked coins.

Consensus Mechanism

Sidechains have their own consensus mechanisms, enabling them to validate and process transactions. In the simplest terms, a consensus mechanism is a system for validating transactions. It consists of validators, miners, or federations (the term will vary from sidechain to sidechain). Their role is to maintain the sidechain’s consensus. That means they must agree on a single state of the network before updating the sidechain.

Validators play a crucial role in validating and processing transactions on the sidechain, as well as in producing blocks and securing the network. Serving as a trusted intermediary, validators ensure the integrity of transactions as they are transferred between the mainchain and the sidechain.

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Sidechains contribute to solving Bitcoin's scalability challenge by lowering transaction times, reducing costs, and augmenting the mainchain's programmability.

Let’s look at these potential improvements.

Better Efficiency

Since sidechains are independent of the mainchain, they can customize a consensus algorithm built for increasing transaction speeds and lowering fees. For instance, a sidechain may have a block time that is lower than 10 minutes, enabling it to produce blocks faster than Bitcoin. This allows the sidechain to process transactions within a shorter time than the mainchain, thereby preventing network congestion. Case in point, Rootstock (RSK), a Bitcoin sidechain, has a confirmation time of 30 seconds, which is much faster than Bitcoin’s.

Enhanced Programmability

Besides improving transaction throughput, sidechains can leverage new programming languages or existing virtual machines capable of supporting complex smart contracts. This enables developers to build a variety of dapps on Bitcoin sidechains, thereby creating more utility for users.

For example, Rootstock utilizes the RSK virtual machine (VM) based on Ethereum’s VM. As a result, Rootstock can support dapp development with tools built for Ethereum and allow developers to deploy Ethereum smart contracts on it.

Rootstock is a Bitcoin sidechain created by Rootstock Labs. It enhances Bitcoin’s scalability by enabling a 30-second transaction confirmation time and integrating EVM-compatible smart contracts.

Developers can build decentralized applications on Rootstock and users can transact at faster speeds. Rootstock is interoperable with Bitcoin via a two-way peg bridge, which utilizes a coin known as Smart Bitcoin (RBTC). RBTC is pegged to BTC on a ratio of 1:1, meaning the value of 1 RBTC mirrors that of 1 BTC.

When transferring (bridging) BTC from L1 to Rootstock, a user initiates a peg-in transaction wherein their BTC is sent and locked in a multisig address. This action triggers a simple payment verification (SPV) proof to be sent to the Rootstock smart contract, permitting it to unlock an equivalent amount of RBTC. The coins are then sent to the user’s Rootstock address. When moving assets in the opposite direction, the user must initiate a peg-out transaction to lock RBTC and release BTC. A group of nodes is responsible for signing the multisig address to unlock the user’s BTC.

As previously mentioned, sidechains optimize their consensus mechanisms to achieve superior transaction efficiency compared to the mainchain. Rootstock accomplishes this through the process of merge mining, allowing Bitcoin miners to secure it in exchange for rewards. This enables Rootstock to tap into Bitcoin’s hashing power without requiring miners to buy new mining equipment, since they can secure both chains using the same resources.

As of writing, Rootstock is using 53.2% of Bitcoin’s hash rate. In merge mining, new coins are not created. Instead, rewards are paid in BTC and generated from the transaction fees that sidechain users pay.

Pros

• Faster transaction speeds: Sidechains are built for scalability, allowing them to confirm transactions more rapidly than the mainchain.
• Lower transaction fees: Better transaction efficiency in terms of speed leads to lower costs for users.
• Increased utility: Bitcoin sidechains that leverage expressive smart contracts promote dapp development, which in turn brings more use cases to the Bitcoin ecosystem.
• More users: Increased utility and improved efficiency attract more users to the Bitcoin space.

Cons

• Smart-contract risk: Smart contracts with bugs are easy to exploit, putting users’ funds at risk of theft.
• Security risk: Reliance on trusted validators poses a trade-off, as users’ assets could be dealt with maliciously.
• Less decentralized: Sidechains somewhat forgo decentralization and trustlessness to attain better scalability than the mainchain. While they strive to be decentralized as well, they will most likely never be as decentralized as Bitcoin because of the inherent trade-offs involved.

Less secure: Typically, sidechains have their own security model and don’t fully benefit from the mainchain’s security.

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Bitcoin sidechains bring added utility by allowing developers to build the following products:

DeFi

Currently, the most popular use case for Bitcoin sidechains is the development of DeFi applications to bring decentralized finance to Bitcoin.

The biggest DeFi protocol in the Bitcoin space is Sovryn, built on Rootstock, which enables users to trade, borrow, lend, and stake in a decentralized manner.

Dapps

In addition to DeFi protocols, developers can build a wide range of other dapps on Bitcoin sidechains, potentially attracting more users from the broader Web3 community to Bitcoin.

Dapps can focus on a variety of use cases, ranging from gaming and social media to gambling and more.

NFTs

Bitcoin sidechains with smart-contract support allow projects to mint non-fungible tokens (NFTs) representing digital art, collectibles, and other assets. Smart contracts are required to mint NFTs, assign ownership, and reassign it to a buyer after a sale.

The Liquid Network is an example of a Bitcoin sidechain that supports NFT creation and the tokenization of securities, physical assets, and fiat money.

Stablecoins

Sidechains can also have stablecoins that allow users to preserve the value of their assets during periods of high volatility. For example, the Sovryn Dollar (DLLR), operating on Rootstock, is pegged to USD on a ratio of 1:1 and is collateralized by BTC.

As the name suggests, a stablecoin is a digital currency tethered to a price-stable asset like USD. The relative price stability of stablecoins makes them ideal for DeFi lending and liquidity provision on AMM-based decentralized exchanges.

Although Bitcoin sidechains are helping to scale Bitcoin, they face security and decentralization issues.

Fortunately, BitcoinOS provides a better and more innovative Bitcoin scaling solution that utilizes interoperable rollups, expressive smart contracts, and near-trustless BTC rails, all the while leveraging Bitcoin’s security.

Moreover, BitcoinOS’s near-trustless BTC rails improve trust minimization. These rails enable the transfer of assets between the data availability (DA) layer (i.e., Bitcoin) and its sovereign rollups.

Thanks to these features, BitcoinOS is positioned to become a superior Bitcoin scaling solution that will promote increased innovation within the Bitcoin ecosystem. The superchain is scheduled to launch on the mainnet in Q4 2024.

Buy SOV to participate in Sovryn’s Bitocracy and have your say in the new era of Bitcoin.

Is a sidechain a blockchain?

Yes, sidechains operate as independent blockchains running alongside Layer 1 networks, aiming to enhance scalability. They have their own consensus mechanisms and nodes in charge of transaction validation and security.

Despite their independence, sidechains link to the mainchain via a two-way peg bridge that enables the transfer of assets back and forth between the two networks.

Additionally, sidechains like Rootstock also link to the mainchain through a consensus mechanism that allows them to tap into Bitcoin’s security through the process of merge mining.

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