Top sidechains
The bandwidth problems of legacy blockchains such as Bitcoin and Ethereum have prompted developers to look for solutions to scale decentralized networks. Changing the blockchain protocols is not easy, so alternative solutions must be found. Sidechains are one of them.
What is a sidechain?
A sidechain is an independent blockchain network that interacts with another blockchain, usually called a parent or main blockchain. Sidecoins are generally created to scale the leading network and expand its functionality.
The main feature of sidechains is the ability to transfer the underlying cryptocurrency from its network to the parent blockchain and back again.
Sidechains solve problems such as:
- Low bandwidth: Sidechains provide performance solutions capable of processing transactions at high speed and scaling the underlying network;
- High transaction costs;
- Lack of functionality: sidechains can have smart contracts that greatly enhance the use of cryptocurrencies such as BTC;
- Lack of lack of flexibility: sidechains allow for experimentation with network functionality without security risks to the underlying blockchain;
What are the differences between sidechains and Layer 2 (L2) blockchains?
Sidechains are often confused with Layer-2 blockchains such as Arbitrum or Optimism, but they are different. Layer-2 networks use the consensus of the "parent blockchain," while sidechains operate entirely autonomously and have their consensus mechanisms.
In other words, Layer-2 blockchains have no validators and rely on the security of the underlying network. Sidechains, on the other hand, have their security model. However, some blockchains are both sidechains and second-tier networks. One such blockchain is Polygon.
Note, however, that sidechains are usually considered second-level networks as well, although this is not entirely correct. Now, let's look at some examples of sidechains.
Polygon
Polygon is unique because it works as a sidechain and a Layer 2 network for Ethereum scaling. Unlike other L2 blockchains such as Arbitrum and Optimism, Polygon has its Proof-of-Stake-based consensus mechanism.
The Polygon network was launched in 2017 under Matic Network and wasn't renamed until 2021. Polygon is the largest sidechain by capitalization and is among the top 15 cryptocurrencies, according to CoinMarketCap.
In addition, the Polygon network is one of the most used networks among users and well-known international Web2 companies like Starbucks, Walt Disney, Visa, and Mastercard, which integrate this blockchain for their products and often release their NFT collections based on it. Polygon ranks second to Ethereum in terms of users attracted, which exceeds 15.2 million, and even beats Bitcoin and Solana.
Liquid Network
The leading and one of the first Bitcoin sidechains released by the well-known company Blockstream. Liquid Network sidechain appeared in September 2018, and the launch of the network involved such well-known companies in the crypto industry as:
- Atlantic Financial,
- Bitbank,
- Bitfinex,
- BitMEX,
- OKCoin.
Because of the similarity in name, Liquid Network is often compared to Lightning Network, but they are entirely different solutions, although they perform roughly the same functions. The critical difference between the two is that Lighting Network is focused on users, while Liquid Network is designed as a solution for corporate clients such as crypto exchanges.
Liquid Network supports various features such as:
- confidential transactions;
- smart contracts;
- issuance of tokens such as stablecoins, tokenized shares, and other financial instruments. On the Liquid Network, tokens are referred to as "synthetic assets";
- a consensus mechanism that ensures blocks are mined every minute;
- atomic swaps — exchanges of tokens over the blockchain;
- transfer of BTC cryptocurrency between Bitcoin and Liquid Network using "wrapped" tokens;
As of February 2024, more than 3,800 L-BTC — "wrapped" tokens backed by real Bitcoin — are circulated.
Stacks
Another Bitcoin sidechain powered by Bitcoin's own Proof-of-Transfer (PoX) consensus is a unique mechanism that simultaneously supports Proof-of-Work mining and Stacks.
The Stacks blockchain was launched in 2019 and, as of February 2024, has an extensive ecosystem consisting of dozens of DeFi protocols and networks such as Injective, Chainlink, and others.
The main asset of the network is the Stacks Token (STX). STX holders can use the tokens for staking and get rewarded in bitcoins.
Gnosis Chain
Gnosis Chain is considered one of the first Ethereum sidechains, though nowhere near as popular as Polygon. The blockchain has a native GNO cryptocurrency for various DeFi marketplace transactions and commission payments and is one of the top 100 cryptocurrencies by capitalization, reaching $600 million.
Gnosis was founded in 2015 and operates as a decentralized autonomous organization (DAO) managed by the GnosisDAO community. In November 2021, the GnosisDAO community partnered with xDAI to launch the Gnosis Chain sidechain to solve Ethereum's scaling problems.
Behind the creation of Gnosis is the ConsenSys team, which has released the most popular EVM wallet, MetaMask, and is currently preparing to launch the Linea Layer 2 network. Gnosis has a well-developed ecosystem that includes several DeFi protocols:
- decentralized exchange (DEX) CoW Protocol (Confidential of Wants), formerly known as CowSwap and Gnosis Protocol;
- Conditional Tokens prediction markets;
- Gnosis Safe wallet with multi-signature support and programmable accounts (account abstraction);
- Gnosis Auction and Zodiac DAO protocols.
Rootstock
A sidechain for Bitcoin that uses smart contracts to tokenize BTC and exchange assets between blockchains. When wrapped tokens are generated, BTC coins are locked in the leading Bitcoin network, and the corresponding amount of SBTC is released in the Rootstock sidechain.
The project was first proposed in 2014, but the leading Bamboo network was only launched in 2018. Rootstock allows the creation of decentralized applications (dApps) based on the Bitcoin protocol, has its own native RSK token, and uses the Lumino Transaction Compression Protocol (LTCP) payment off-chain protocol capable of handling 2,000 transactions per second (TPS). The throughput of the Rootstock sidechain itself reaches 100 TPS, about 14 more than Bitcoin, and the block confirmation time is about 10 seconds.
Conclusion
Analysts believe that L2 solutions and sidechains will become one of the main narratives as early as 2024, which could be driven by an influx of new users that will put blockchains like Bitcoin and Ethereum under even more pressure.
At the end of 2023, the renowned Spartan Group fund reported that the trend would spread to L2 solutions and Bitcoin sidechains. The fund highlighted this segment's "big four": Lightning Network, Liquid Network, Stacks, and Rootstock.