What Are Cryptocurrency SideChains: Differences Between Blockchains?


The cryptocurrency community has been talking about sidechains and how they work. However, it is not clear what they are and how they influence crypto blockchains. Since Blockstream launched Liquid Network, there are several users that are trying to understand how these sidechains work.

Basically, sidechains are blockchains that are separated from a specific main net. In order to work and be connected to the main network, they use a two-way peg system. Those sidechains can also use a new asset that is backed at a fixed rate to another crypto.

For example, the Liquid Network uses a token known as Liquid Bitcoin (LBTC) and it is pegged 1:1 to Bitcoin (BTC). In order for the network to confirm that the assets are valid, the users need to send them to a custom address. In this way, miners can confirm the transaction. After being verified, the sidechain can issue the pegged asset.

Sidechains allow mainnets to be free from developers that are trying to experiment with new protocols and systems. At the same time, they provide higher liquidity and enhanced transactions.

Currently, Bitcoin has several sidechains, including RSK, Liquid and Hivemind. For example, RSK has introduced smart contract to Bitcoin, similar to what Ethereum does. Liquid instead has faster trading options and better privacy. Hivemind introduces prediction market capabilities to Bitcoin.

In general, these sidechains can be easily attacked by miners since there are no incentives to protect them. Users interested in attacking them can easily process a 51% attack.

There are some incentives that these networks have created in order to attract new miners. That includes demurrage, merge mining and fees, native tokens and business alignment.

If users want to have access to a different blockchain, they have to buy the asset of these other platforms. However, if sidechains work properly and are safe to use, then, they could eventually eliminate the need for altcoins or other networks.

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