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With the rapid growth of the disruptive technology known as the blockchain, maintaining records and transactions will become more credible in the future. You can save verified tamperproof data anywhere in the world at any moment using this technology. For the most part, it’s a trustworthy immutable database that may be referred to when dealing with disputes, authenticating transactions, verifying ownership, and other similar activities.

Blockchain technology has enormous promise, but it has not yet reached the scale where it is dominating global markets. Given the inherent limitations of the technology, it has been unable to advance. The main issue with blockchain now is how quickly transactions can be processed and the limits to blockchain scalability.

Verification of blockchain transactions is a time consuming and computationally intensive process. Nonetheless, these processes are a significant part of what distinguishes blockchain transactions from regular transactions. Due to these speed restrictions, blockchain technology has been unable to be fully integrated with quicker mainstream operations. The Bitcoin Blockchain can only process five transactions per second (TPS), but Ethereum can process 10 to 15 TPS. Visa, on the other hand, can process up to 24,000 TPS.

This fuelled a need to address this issue as soon as possible since scalability may determine the future of the technology and its acceptance. To speed up the processing of blockchain transactions, Second Layer Blockchain Solutions were created.

When transactions are separated into sets and stored on a second layer, the blockchain can process more transactions in a day.

They’re a second-level framework built on top of preexisting blockchains. Secondary layer systems are independent of the main blockchain and process sets of transactions independently of it (off-chain). This approach is critical to the growth of the blockchain so that it can compete with more traditional payment systems like Visa and MasterCard.

Second Layer Blockchain Solution – Types

Intricate protocols meant to improve the blockchain’s functionality make up second layer blockchain solutions. They employ sophisticated algorithms and technologies to improve transaction speed, verification, and security. There are mainly two different types.

• State Channels: ex; The Bitcoin Lightning Network
• Side Chains: ex; Polygon

The main focus of this article will be on Sidechains.

What are Sidechains?

Depending on whom you ask, sidechains can mean various things to different people. The concept of a sidechain has had a rocky past. In layman terms, a sidechain may be defined as a blockchain that can communicate with another blockchain.

Sidechains may be divided into two categories: those with two separate blockchains and those interdependent. To put it another way, if one blockchain is a sidechain of the other, both blockchains are equal, and occasionally both blockchains will have a native cryptocurrency of their own. 

In the second case, one sidechain may be considered a parent chain and the other as the dependent or ‘child’ chain. When there is a parent-child sidechain relationship, the child chain often does not create any assets of its own. Instead, it derives its assets through transfers from the original chain.

Even though sidechains can interact in a variety of ways, one of the most common is asset exchange. A 2-way peg is used to do this. If you have BTC and desire ETH, you may use the BTC-ETH pair to trade your BTC for ETH. This is the simplest 2-way peg to comprehend. Unfortunately, utilizing a centralized exchange necessitates the use of an intermediary, which means fees are required, and there is an element of third-party risk. There is a more effective approach.

Essentially, a decentralized 2-way peg is made up of “lockboxes” that are located on both the Bitcoin and Ethereum blockchains. In order to better understand how these lockboxes aid in the transfer of assets, let’s take a look at a basic practical example.

Suppose you wish to move one bitcoin from the Bitcoin network to a sidechain. How would you do it? Before you can do anything further, you must first submit a one-bitcoin transaction to a specific Bitcoin lockbox address. If you have Bitcoin in a lockbox, it means that it’s temporarily removed from the total supply of Bitcoins in circulation. 

Additionally, you must include information about the BTC sidechain address where you wish to transfer the funds in that transaction as well. The sidechain lockbox releases 1 BTC and transfers it to the address specified in the Bitcoin network transaction after the transaction has been received by the Bitcoin network and stored on the blockchain. To send the BTC back, simply do the opposite of what was just detailed.

Often referred to as a bridge in the crypto world, a 2-way peg is used to transport assets from one chain to the next and back again. Assets can be traded as well as transferred across bridges. A bridge can support BTC to BTC transfers, but it may also support BTC to ETH transfers if they are designed that way. The design of a bridge can differ considerably. Powpegs, SPVs, federated systems, and collateralized ones are only a few examples.

Sidechains – Advantages

• Scalability, experimentation/upgradability, and diversification are the three major advantages of sidechains.

• On the other hand, by transferring a certain sort of transaction to a different chain with a protocol specifically designed for that form of transaction, a sidechain can provide faster and cheaper transactions. As a result, the first chain should be less clogged, which should make it faster and cheaper. Sidechains can also take advantage of newer, quicker, and more efficient methods.

• Experimentation/upgradability: It might be challenging to upgrade an established blockchain with several stakeholders. Consensus-building takes time, and in certain cases, is impossible. To test and deploy new ideas, sidechains enable an informal consensus to be formed. In many ways, scalability is enabled by the capacity to experiment and upgrade.

• Diversification: More individuals will have access to assets if there is diversification across the blockchains. DeFi applications that lend or borrow money have access to other chains’ assets.

Sidechains – Disadvantages

Sidechains are solely in charge of their own security; the security of a sidechain is not dependent on the main chain. In a way, this is both good and bad. This implies that the weak security of one blockchain does not compromise the security of the other chains. On the other hand, popular blockchains like Bitcoin can’t provide any security level to smaller, less prominent blockchains.

Also, sidechains are dependent on their own miners. Most blockchains rely on a broad group of miners to keep their networks safe. However, because newer chains are less profitable for miners, they must try their utmost to expand their mining ecosystem. However, this is tough. In parent-child sidechains, the child chain generally does not have its own native coin, which might make things worse. Because their primary source of revenue is from the issuance of local currencies, this works as a disincentive for miners.

Last but not least, some users may make assumptions about their assets on one blockchain that turn out to be incorrect when those assets are moved to another. For example, if you retain BTC due to Bitcoin’s security and trust model, you can be sure that the security will be weaker, and the trust model would be different if you move BTC to a sidechain.

A look at Polygon, the most popular sidechain right now

That’s basically everything there is to sidechains that you need to know to get started with. Now let’s look at the example of Polygon. Polygon’s growth over the past years is the perfect example of how important sidechains are for the crypto industry.

Polygon is a combination of two sorts of sidechains. You can create child chains that can execute transactions before they’re eventually completed on the Ethereum blockchain by using the Plasma Ethereum framework. Polygon can be used with EVM. It uses Proof-of-Stake validators to distribute its own native coin, MATIC. Plasma and the Proof-of-Stake validators are the two 2-way pegs in this system.

Polygon’s mission is to connect different blockchains together. Due to Polygon’s EVM compatibility, it should be easier to connect to other EMV-compatible blockchains like SmartBCH than connecting to a blockchain like Bitcoin.

Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.