A blockchain ledger that runs in parallel to a primary blockchain, where there is a two-way link between the primary chain and sidechain.
A sidechain is a side blockchain that is linked to another blockchain, referred to as the main chain, via a two-way peg.
Imagine a global decentralized network of various blockchains, each with their own sets of rules, functionalities and purposes, that remain independent from each yet form one seamless ecosystem. That’s the sidechain vision.
This sophisticated cryptographic mechanism enables tokens and other digital assets to move back and forth freely from the main chain. An example of a sidechain is the Liquid Network, a settlement layer that allows traders and trading platforms to enjoy faster and more private transactions, as well as digital asset creation. Since the Liquid Network is pegged to Bitcoin, which is the main chain in this example, only activities involving Bitcoin are possible.
It works like this:
The main chain user first needs to send coins or other digital assets to an output address where they are locked and unspendable anywhere else. After the transaction is complete, a confirmation is relayed across the chains. This is followed by a waiting period for added security. Afterward, the coins or assets will be fully transferred on the sidechain, enabling users to move them around freely on the new network. If a user wants to send the coins back to the main chain, he only needs to reverse the process.
Sidechains come in many variations depending on the functions they are built for. While both Liquid and Rootstock are Bitcoin sidechains, they function very differently, since the latter is specifically created for the purpose of running smart contracts more efficiently.
Ethereum 2.0 has its own variation of sidechains called shard chains that are attached to the recently launched Beacon Chain, which aims to ultimately become the main chain of proof-of-stake (PoS)-based Ethereum.