If you’re a digital currency fan, then chances are at some point you’ve heard about sidechains. While they are not popular yet, sidechains allow cryptocurrency users to utilize their coins for various purposes on different blockchains, without having to purchase the afferent tokens or develop an entirely new digital currency.
A mental model
To put things into perspective, it is important to understand the 3 main steps of a bitcoin transaction, these being:
- The following X coins need to be moved.
- The proof of ownership consists of the public and private keys to a specific bitcoin address.
- To use the coins, the recipient must fulfill the security challenge, and therefore prove that he or she owns the private and public keys to the recipient bitcoin address.
The main purpose of the sidechain concept is to allow people to not only send Bitcoin to individuals, service providers, and Bitcoin addresses; but also to different blockchains. Practically, this isn’t possible, as each blockchain network deals with a specific token or digital currency, with no cross-compatibility.
If a user wanted to take advantage of features offered by another blockchain (e.g. speed, lower fees, better security, etc.), sidechains would come into use.
The sidechain protocol works as follows:
- Send your coins to a Bitcoin address specifically designed to put the coins out of your or anybody else’s control, thereby immobilizing them. Unlocking them is only possible if they aren’t used anywhere else.
- Send a message to the other blockchain containing proof that the coins were immobilized. If the second blockchain agrees to the use of sidechains, it will proceed to create the very same number of tokens on the network and grant you control of them. Practically, this grants you control of the same tokens, available in the mother currency on a different blockchain.
- Transact the coins on the second ledger, according to the rules set into place there. Users can now take advantage of the benefits offered without needing to purchase separate tokens or create a currency of their own.
To regain access to the coins on the original blockchain network, the same principle would apply. You’d create a transaction immobilizing the afferent tokens, thus putting them out of your control. They would then disappear from the secondary chain, and once again be available on the original blockchain network.
In theory, the sidechain protocol leads to increased flexibility across blockchain networks by allowing users to spend their coins on various blockchains without needing to sell or purchase anything new. This allows individuals to take advantage of different blockchain network benefits, without being at a loss.
