What is Sidechain

A sidechain is a separate, independent blockchain that runs in parallel to a main blockchain and is connected to it through a two-way peg a mechanism allowing assets to move between the main chain and the sidechain while maintaining equivalent value on both sides. Sidechains enable additional functionality, higher transaction throughput, or specialised features without modifying the main chain's protocol.

HOW SIDECHAINS WORK: THE TWO-WAY PEG

To move assets from the main chain to a sidechain: Users lock their mainchain assets (e.g., BTC) in a smart contract or multi-sig address on the main chain. An equivalent amount of "pegged" tokens is created (minted) on the sidechain, representing the locked main chain assets. Users can transact freely on the sidechain using these pegged tokens. To return to the main chain, users burn the sidechain tokens and unlock the original assets on the main chain. The peg mechanism ensures that the total supply across both chains remains constant.

SIDECHAIN VS. LAYER

2Sidechains have their own independent consensus mechanisms and validator sets they are not secured by the main chain. This gives them flexibility but means their security depends on their own validator set, not the main chain's security. Layer 2 solutions (rollups) derive their security from the main chain by posting proofs or data to it a significantly stronger security model.

NOTABLE SIDECHAIN IMPLEMENTATIONS

Liquid Network (Bitcoin): Operated by a federated group of exchanges and financial institutions, Liquid enables confidential transactions, fast settlement (2 minutes vs Bitcoin's 10), and asset issuance on Bitcoin primarily for institutional trading.
Polygon PoS (Ethereum): Originally a sidechain (now more of a validium/commit chain), Polygon PoS provides fast, low-cost Ethereum-compatible transactions secured by its own validator set.
Gnosis Chain: Originally xDai, Ethereum sidechain now secured by Gnosis validator set used for stable micropayments.
Rootstock (RSK): Bitcoin sidechain enabling Ethereum-compatible smart contracts secured by merge mining with Bitcoin.

Terms in addition to the Sidechain

Blockchain

A blockchain is a subset of a distributed database. The Bitcoin inventors originally prototyped the system in 2008. This modern database is made up of separate blocks that are connected together in a chronological chain. Blockchains may be used to store a wide range of data types. It has mostly been utilized as a public ledger for bitcoin transactions to date. A peer-to-peer network comprised of independent nodes uses a consensus process to ensure the blockchain's security and legitimacy. Each node in the network keeps a public and immutable copy of the data.

2 Factor Authentication (2FA)

2 Factor Authentication is a security measure with two layers. It is used by the majority of cryptocurrency exchanges. To log in, you must provide not only a password, but also a code obtained, for example, from the Google authenticator.

Airdrop

An airdrop is a method of distributing coins. End users can typically obtain coins for free or in exchange for doing a small task, such as subscribing to a newsletter, sending a tweet, or inviting others via a personal affiliate link. Cryptocurrency airdrops — the act of depositing cryptocurrency into public crypto wallets — are utilized as a marketing, liquidity creation, and network bootstrapping technique for many different types of blockchain initiatives.

Altcoin

Altcoin - "alternative coin" - is any kind of digital currency other than Bitcoin. Since the launch of Bitcoin, the world's first digital currency, many altcoins (as well as supporting blockchains) have been created. Altcoin digital currencies share many similarities to Bitcoin, but consistently and have significant differences. There are about 20,000 altcoins, and this number is expected to grow significantly in the coming years. Altcoins often develop Bitcoin features. Ethereum, currently the most widely used blockchain, supports digital contracts and separate applications where Bitcoin does not. Altcoins are also often created to cater to the needs of different users. The Litecoin blockchain, for example, can process payments quarterly for the duration of Bitcoin.

Cold Storage

Cold storage is the way to store cryptocurrency offline. The word refers to the use of offline wallets that are not connected to the internet. Cold storage is the most secure way to keep cryptocurrencies since an offline currency becomes less likely to be hacked and stolen. Paper wallets, printed renditions of private keys, and offline hardware and software wallets are all examples of cold storage.