CRYPTOCURRENCY SIDECHAIN: WHAT IS IT?

Interconnectivity between cryptocurrency networks and moving away from centralized exchange points is another highly relevant issue, one that stands alongside network scalability. Its essence is that any user who wants to get, for example, Lightcoins for his Bitcoins, must initially exchange them through an intermediary resource, paying a commission. Cryptocurrency sidechain is one of the means to solve this problem. What is the essence of sidechains?

• CRYPTOCURRENCY SIDECHAIN: WHAT IS IT?

A cryptocurrency sidechain is a separate blockchain that operates with a two-way tie to the main blockchain. That is, it is essentially a separate blockchain based on another blockchain that can both receive its transactions and send them back. This technology was first talked about back in 2014, and its first creator is believed to be Blockstream, which described how sidechains work in a White Paper to its project that same year. In one of our previous publications, we have already written about what a sidechain is and considered in more detail the principle of its operation.

• CRYPTOCURRENCY SIDECHAIN

Cryptocurrency sidechains have three fundamental tasks at once:

Simulation. Such offshoots can be used to test updates to the main blockchain without changes to the main chain.
Commercial objectives. The use of sidechains will simplify transfers by reducing transfer fees. This technology is already used in Liquid by Blockstream to serve exchanges, traders, and processing services.
Transfers between networks. Using sidechains, it will be possible to make transactions from one cryptocurrency network to another without unnecessary costs and long waits.
Thus, cryptocurrency sidechains can play a very significant role in forming a completely new ecosystem with more opportunities for users.

• CRYPTOCURRENCY SIDECHAIN: DISADVANTAGES

One of the main disadvantages of sidechain technology is the existence of an intermediate link between the main and third-party blockchain - federations. Feds determine when coins sent from the parent chain are frozen and when they can be spent. This in turn leads to risks of centralization of the entire technology, as federations can be determined by the creators of the sidechain.

Today, cryptocurrency sidechain is used in a number of projects, including Liquid by Blockstream, Rootstock, Ardor and others. Lisk developers are also taking a closer look at the technology.