Lack of scalability has been one of the biggest problems of blockchain technology since the release of Bitcoin back in 2009. Slow transaction speeds, high fees, and congestion have become major stumbling blocks, but sidechains may offer a solution.
In this piece, we cover everything you need to know about sidechains, from the basic definition to the evolution of this technology to potential applications for blockchains.
We not only discuss why sidechains are important from a technical perspective but also why they are an integral part of driving real-world uses of blockchain technology.
Sidechains, Explained in Simple Terms
Think of it this way. A blockchain can be compared to a highway for vehicles. While one lane may be enough for a steady flow of cars, it probably can’t support a surge of hundreds of thousands of vehicles.
If there are thousands of cars on the highway, it’s likely to result in slower travel times and increased congestion.
The best way to solve this is by creating a better infrastructure for travel.
Now, apply this concept to blockchain technology. The intent of any blockchain is to be able to easily send and store all user data (for example, transactional data of cryptocurrencies, data for dapps and smart contracts, and more).
The biggest issue, however, is that each blockchain has traditionally been reliant upon one lane of traffic – the mainchain.
By creating multiple roads that connect to the main road, we can create a more efficient transportation system. Similarly, this concept can be used in blockchains.
Sidechains are mechanisms that allow for data processes to take place off the mainchain, all while being connected to the mainchain if needed. Just as a car can travel back and forth from the main road to a side road, so can data between a blockchain’s mainchain and its sidechains.
The difficult part is moving assets (like bitcoin) from the mainchain to a sidechain securely, while proving the bitcoin is yours.
Done correctly, however, it’s theortically possible to make faster transactions via a sidechain, or even swap bitcoin to ether without using an exchange.
Why Are Sidechains Needed?
At first, blockchains didn’t technically have a major infrastructure issue. However, as traffic increased, we began to see these issues become more apparent.
Take the Ethereum blockchain, for example. As more people started using CryptoKitties and other dapps, network fees increased. Scalability problems became more obvious.
Similar to roads during rush hour traffic, blockchains were (and still are) mostly unprepared to deal with an increase in users and transactions during peak usage times. This became particularly obvious in December 2017.
More People Using Blockchain = More Congestion
Around December 2017, we saw a range of factors expose the scaling problem of blockchains:
First, more people were buying cryptocurrencies due to a bull market.
Second, new dapps that used large amounts of data were arriving on the scene.
Third, there was a rapid increase in the number of initial coin offerings (ICOs) that utilized existing blockchains to issue new tokens.
All of this culminated in record highs for blockchain transaction fees. Blockchain project teams certainly knew that this problem could happen but didn’t necessarily know the extent of the impact.
That’s why research has been going on to develop a variety of scalability solutions. Sidechains have been discussed for quite some time but weren’t yet capable of providing the solution that was needed at that time.
Although we haven’t seen congestion like December 2017 since, blockchains need to prepare for the future.
For instance, projects have to consider how another bull market could once again expose scalability issues.
Additionally, we should consider the potential for new blockchain innovations (beyond just cryptocurrencies). These will require larger amounts of data, potentially beyond the limits of mainchain technology. Sidechains are one proposed solution to expand the types of apps that blockchains are capable of running.
Why Haven’t Sidechains Been Adopted Sooner?
In blockchain technology, all sorts of advancements have been made only in the last couple of years. So why do some integrations (i.e. addition of sidechains) take longer than others? This is a valid question.
The best answer is that implementing newer technologies comes with big risk. Look at blockchain platforms like Ethereum and EOS. Not only do they feature their own native cryptocurrency but they also support dapps and tokens from other projects.
By not considering all of the current and future risks of making a big change like sidechain integration, any given blockchain risks not only its own project but also hundreds or thousands of others.
In theory, sidechains can ensure much greater scalability without risking the security of the mainchain. In reality, this hasn’t yet been 100% proven.
The “Scalability Trilemma”
Ethereum founder, Vitalik Buterin, summed things up when he outlined the “scalability trilemma.”
The trilemma points to three things key to blockchain technology: security, decentralization, and scalability.
Most solutions can improve one or two of those things, but usually at the expense of one of the others. In other words, if you want scalability, you probably have to sacrifice security and/or decentralization.
This is the case with sidechains.
Sidechains have been notoriously difficult to implement because they rely upon SPV (simplified payment verification proofs). With SPV proofs, it’s possible to prove ownership of funds when sending from a sidechain to the main chain.
However, without SPV proofs, there is a possibility that, when users or miners move their money back to the main chain, they could take more cryptocurrency funds than they really own in some scenarios.
According to some research, SPV proofs are also subject to a few different types of attacks, which creates a potential security risk for the entire blockchain. This is why, “trusted sidechains”, which are more centralized sidechains run by a few blockchain companies, have dominated sidechain implementation as of 2018.
Since the goal of most blockchain project teams is to move towards a more decentralized system, relying upon a trusted/centralized sidechain would run counter to their core principles.
At the same time, scalability is also a top priority. Still, development teams have been reluctant to accept an either-or scenario where scalability is achieved by sacrificing decentralization.
Progress in Sidechain Technology
The discussion of how to make blockchain technology more scalable has been going on since 2012.
Sidechain-specific research has been going on since around 2014. For the most part, sidechains remain in the research and development phase even in 2018.
This is because researchers have felt that the technology still lacks certain key components needed for real-world implementation. However, this has begun to change just in the past year or so.
In October 2017, Aggelos Kiayias, chief scientist at IOHK, made a technical breakthrough that could help propel sidechains into the next stages of adoption. In a scientific paper called “Non-Interactive Proofs of Proof-of-Work”, Kiayias explains the increasing importance “to be able to efficiently handle multiple blockchains by the same client and reliably transfer assets between them.”
In this research, Kiayias outlines the world’s first Proof of Proof-of-Work. The research shows that this proposed design could use SPV proofs that are able to prevent many of the normal attacks.
From a security standpoint, Kiayias’ work is a major milestone for not only the adoption of greater scalability within one blockchain but also across multiple blockchains.
Bitcoin, Ethereum, EOS: Cross-Blockchain Communication
In the paper, Kiayias describes an ICO which distributes tokens issued on one blockchain but allows paying for them using coins in another blockchain.
Essentially, using this research to build a real-world application could allow for the possibility of cross-chain communication.
For instance, in the future, we could see interoperability between different blockchain networks (i.e. Bitcoin and Ethereum, EOS and NEO, or a variety of other combinations).
This is one of several ongoing efforts by around the globe to research how to improve the performance of sidechains. Here are some more important examples.
3 Projects Focused on Sidechain Deployment
Developed by Blockstream, this project was actually the first commercial sidechain on the market. It has already been implemented by a few different cryptocurrency exchanges. With Liquid, every transaction uses real bitcoin, pegged via a sidechain to the Bitcoin blockchain. This solution also ensures that users are always dealing with real, verifiable assets.
This project uses a federated sidechain – a private blockchain with different features, capabilities, and benefits than the main Bitcoin blockchain.
According to the Liquid website, Liquid will never be as decentralized as Bitcoin. However, it is designed to remove control from any single party, geographic location, or political jurisdiction.
It also allows for increased privacy via the “confidential transactions” feature, which hides transaction amounts from everyone except for the parties directly involved in the transaction itself.
This is a solution that uses a series of smart contracts that run on top of the Ethereum blockchain. Plasma’s goal is to scale Ethereum to be able to handle millions (or even billions) of transactions per second, compared to the current amount of only 10-15.
This is possible because Plasma eliminates the need for every node on the network to verify all transactions as they occur.
Altcoin.io is one decentralized exchange that has created its own Plasma-like sidechain architecture to ensure that transactions are trustless and secure, but still extremely fast.
Projects like Ethereum and OmiseGO are driving the research, development, and implementation of Plasma as a scalability solution. Ethereum’s Vitalik Buterin said in May 2018,
“So if you get a 100x from Sharding and a 100x from Plasma, those two basically give you a 10,000x scalability gain, which basically means blockchains will be powerful enough to handle most applications most people are trying to do with them.”
What sets Rootstock (RSK) apart from many other proposed solutions is that it is a drivechain/sidechain hybrid two-way peg designed to port Ethereum’s smart contract functionality to Bitcoin without impacting the main blockchain whatsoever. This is a significant project because it would be the first project to bring any sort of smart contract functionality to the Bitcoin blockchain.
In 2017, crypto security expert Sergio Demian Lerner released information about Lumino, which is a compatible version of the Lightning Network built on top of Rootstock.
During this process, Lerner introduced a new protocol called the Lumino Transaction Compression Protocol (LTCP), which forms the transaction layer to the Lumino network. The purpose of LTCP is to create far smaller bitcoin transactions to enable as many as 100 transactions to be processed by the network every second. That’s six 6-to-33 times higher than Bitcoin’s 2018 transaction limits.
For those concerned with potential privacy concerns, Lerner suggested in 2017 that users could add greater privacy to transactions by techniques like creating new accounts with each transaction or using tumbling services to obfuscate (hide) the origin of their coins.
Future Possibilities for Sidechain Technology
The possibilities for sidechain implementation are continuously increasing with research advancements. Sidechain technology is not just important from a technical perspective. It can enable blockchains to achieve more transactions per second while also reducing transaction fees.
Furthermore, it is one of the most vital components to driving blockchain capabilities far past what is currently possible today. When we look at decentralized applications in 2018, many are still quite rudimentary.
A good comparison is to think of blockchain in 2018 kind of like internet connectivity in the early 2000s.
It was still much better than the 1990s, for example. Still, there was a lot to be desired. Back then, there were no easily-accessible mobile technologies (i.e. 5G networks), so devices couldn’t connect from anywhere.
Connection speeds were also significantly slower. Similarly, blockchains in 2018 are limited in what their services they can do. However, through the proper implementation of sidechain and other scalability solutions, any given blockchain could potentially run numerous types of advanced applications (for example, AI, IoT, and more) that require large amounts of data.
This could empower applications that are merely concepts in 2018 as well as future applications that aren’t even in the theoretical stages yet.
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