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Sidechains have been experimented with for years, dating back to 2012/13-era experiments proposed on BitcoinTalk to enable "BTC-backed alternative cryptocurrencies or ideas like Fidelity-bonded ledgers proposed by Peter Todd on the bitcoin-development mailing list. They were further advanced in a 2014 paper Enabling Blockchain Innovations with Pegged Sidechains written by Blockstream developers.

In many ways, the reasons behind these explorations are exactly why we sidechains make sense today: allowing for novel use-cases of BTC that leverage the benefits, e.g. liquidity, of BTC as a global money—all without expanding the money supply. While Bitcoin may best serve the use case of an uncensorable, secure money system, for users who are willing to accept potential trade-offs around UX or security, sidechains serve as a potential alternative technology implementation that offers parity or even new capabilities without the need for an additional token.

After a few years of stagnation in sidechain development, many sidechains and sidechain-agnostic projects in play today, working on problems ranging from scalability to inter-exchange settlement.

What are sidechains and how do they work?

Just like a sidepiece, sidestep, sideroad, or sidekick, sidechains refer to "another thing that is not the main thing." In all cases, sidechains are rarely the meat, they're simply an additional use case which latches onto the security model of a larger public blockchain (generally Bitcoin or Ethereum).

In order to get started, sidechains make use of a peg. There are, different types of pegs that can be used:

• One-way pegs—where a token is sent from Bitcoin to a sidechain by way of "burn"—is nothing new, we've had proof-of-burn forever. In a one-way peg, the asset issued on the sidechain necessarily requires chain A the corresponding asset on chain A to be destroyed.
• Asymmetric, or two-way pegs, is what most functioning sidechains use. At a high level, on the mainchain A, funds are moved into a lockbox (e.g. a multi-sig contract) and after the transaction is confirmed to the network, a corresponding asset is issued on the sidechain. When use is completed, funds can be transferred over to the mainchain again. At the core of this verification process is an SPV proof, which allows an easy way to verify that funds have not been double-spent across the two chains.

A high-level overview of what a two-way pegged sidechain could look like, courtesy of Blockstream.

A high-level overview of what a two-way pegged sidechain could look like, courtesy of Blockstream.

Sidechains can issue new tokens, anywhere from a 1:1 ratio or a different ratio (in the case that there is a totally new asset issued.

The term "sidechain" is itself a bit nebulous. One way to describe a sidechain is "blockchain that relies on another blockchain for transaction validation" but that obscures the nature of the relationship a bit—given the number of arbitrarily small blockchains that use Bitcoin validation as part of their security model, is Bitcoin a sidechain of another small blockchain?

What are sidechains useful for?

• Addressing trade-offs between cost and security or scalability and decentralization.

Bitcoin offers extremely high security for transactions that follow a strict set of parameters but this comes with extreme cost that's not palatable for everyone. Bitcoin blocks only come out roughly every ten minutes and during times when blocks are full, require higher fees for inclusion in the next block. This, along with the requirement of 4-6+ confirmations means that the base layer chain is infeasible for people who want confirmed transactions faster.

To solve this, alternative cryptocurrencies (e.g. Litecoin) have attempted to shorted block confirmation times, though this just extends the number of blocks required to confirm a transaction as "equivalently" secure. The majority of these projects offer little differentiation to Bitcoin besides this functionality. While other scaling methods improve, some believe sidechains designed for faster transaction settlement could provide a compelling alternative. Yet others see sidechains as a way to offer cheaper transactions with corresponding security trade-offs.