For some time blockchain developers have grappled with the speed and scaling limitations of the technology. In recent months, however, new approaches to so-called “sidechains,” which are separate blockchains linked to larger blockchains such as the one underlying bitcoin (BTC), appear to offer potential solutions.
In late September, the Liquid network launched with the support of more than 20 exchanges and companies. Its developer, Blockstream, has experimented with sidechain functionality since launching its Elements project in 2015. Earlier this year, RSK went live with its own sidechain attached to bitcoin’s network; it allows developers to deploy their own applications and smart contracts.
“The implications of usable sidechains are huge, and the positives clearly outweigh the negatives,” Lucas Nuzzi, lead researcher for Digital Asset Research, said in a series of tweets last week.
Here are four ways sidechains could transform the blockchain space:
Boost Speed, Security and Scale
Blockchains have consensus-reaching mechanisms designed to confirm transactions across their networks. They’re a strength because they ensure the security and immutability of transactions. Yet, they can also be time consuming, a weakness.
One of the selling points of sidechains is they enable greater privacy by recording only a small amount of information to bitcoin’s public blockchain.
Addressing this key hurdle is one of the goals of the Liquid network, which will use its sidechain to send and settle bitcoin transactions much more quickly. That’s a big reason exchanges represent the majority of the network’s launch partners. The technology “will fundamentally change the digital currency exchange landscape by allowing traders and market makers to move their bitcoin holdings instantly within the network,” Philip G. Potter, Bitfinex’ chief strategy officer, said in a statement.
The Lightning Network plays much the same role, though technically it isn’t a sidechain. Instead, it’s a protocol that creates micropayment channels between buyers and sellers that move transactions off not just the main bitcoin blockchain, but all blockchains. BAKKT, the potential 300-pound gorilla announced earlier this year by the parent company of the New York Stock Exchange and other financial giants, also plans a similar off-chain approach to speed cryptocurrency transactions.
But scaling could ultimately do more than aid large institutional transactions. It’s also touted as a way to enable large numbers of real-time cryptocurrency transactions, making them more feasible for in-store retail payments or online microtransactions such as in-app purchases.
One of the original promises of cryptocurrencies was their anonymity: People could make conduct transactions outside traditional banking and financial systems. The reality, however, is that for bitcoin and many other cryptocurrencies, transactions are recorded in a public blockchain, making it possible for researchers – and governments – to determine the identity of the people behind them.
One of the selling points of sidechains is they enable greater privacy by recording only a small amount of information to bitcoin’s public blockchain. Sidechains allow most of the transaction information to be known only to the sender and receiver.
Support Smart Contracts
RSK touts its sidechain as a way of bringing smart contracts to the bitcoin blockchain, which as originally envisioned didn’t allow them. RSK’s smart contracts are written using the same kind of Turing-complete language as those on Ethereum. The Lightning Network also uses smart contract language to govern transactions, and other developers, including Lisk, are providing tools to allow programmers to build smart contract-based dapps on their own sidechains.
Doing so addresses one of the biggest concerns about smart contracts: their propensity for bugginess. In theory at least, exploits which take advantage of contract bugs on sidechains wouldn’t affect the main chain or protocol to which they’re connected.
Bolster Altcoins or Make them Obsolete
With smart contract functionality, sidechains can have their own tokens and even create their own ICOs, as a South Korean startup called Temco plans to do using the RSK sidechain later this year. But they also may take the shine off Ethereum and other blockchains that were built to provide the kinds of functionality that Satoshi Nakamoto’s original bitcoin blockchain doesn’t offer.
Adding smart contracts, scalability and other features through sidechains “opens the floodgates of potential innovation that altcoins have attempted to lay claim to and use as their only leverage against bitcoin over the last five-plus years,” bitcoin advocate Marty Bent, editor of the Marty’s Bent newsletter, wrote last week. “After years of preaching the idea of keeping [bitcoin] slow, stupid, simple and secure at the protocol level while pushing all the complexity to second layers and sidechains, the vision finally seems to be coming together.”