CoinAll：The Necessity and Significance of Sidechain Technologies
By: Jacky Chen
Tags: Bitcoin Blockchain, Lightning Network, Sidechains, Blockchain, Coinall

With the development of blockchain technology and economy, the demand for sidechain is increasingly apparent and concentrated in three aspects: performance extensibility, functional extension and blockchain economy. Today, CoinAll will show you the process of birth of sidechain.

In performance extensibility:

The blockchain system has evolved from Bitcoin, Ethereum network based on PoW to consortium and public blockchains based on PBFT and DPoS consensus algorithms. Even though TPS have improved from single digits to tens of thousands, this achievement has come at the expense of decentralization, failing to accord with the core blockchain concept.

“Sidechain” solutions such as the Lightning Network and “cross chain” solutions such as building multiple sub-chains for distributed consensus have created new ways to improve blockchain system performance. It is expected that better maintaining the concept of decentralization will greatly improve blockchain transaction performance.

In functional extension:

With the development and improvement of smart contract platforms, a large number of diverse vertical public chains and commercial applications have emerged, forming various decentralized independent infrastructure and business systems, such as storage, identity authentication, cloud computing, asset management and E-commerce, etc. However, the current blockchain is a closed and independent business system.

Cooperation between the various business systems of the Internet, such as DingTalk, an enterprise communication and collaboration platform developed by Alibaba Group; or logging in to multiple third-party applications with one’s WeChat account through the WeChat open interface; or simply jumping from one web page or app interface to another, etc.: these functions cannot be realized within the current blockchain business system, which greatly limits its development possibilities. Imagine using cross-chain solutions to call a smart contract on a decentralized asset management blockchain to collect borrower credit data. This technology will greatly expand the application range of the blockchain.

In blockchain economy:

A decentralized exchange based on cross-chain technology can further reduce currency trading friction and improve liquidity. It can act as an effective supplement for centralized exchanges.

For these reason, sidechain was born.

The concept of sidechains is relative to the main chain. When the performance of main chain is limited, or some functions cannot be expanded, the assets are transferred to the sidechain, and the related transactions only need to be executed on the sidechain, relieving pressure on the main chain, and enhancing its performance and function.

Early sidechain solutions mainly involved Bitcoin. By design, the blockchain limits expansion, for instance, through long transaction delays, low throughput, and its non-support of Turing-complete smart contracts. These are all inherent flaws in Bitcoin design, which must be solved by reconstructing the basic Bitcoin framework and algorithms.

But as the digital currency with the largest market cap, highest liquidity, and widest recognition, modifying Bitcoin’s infrastructure involves major risks. Bitcoin’s core developers treat tech upgrades very conservatively, making it difficult for Bitcoin to expand via upgrades.

The basic idea of sidechain technology is to activate another chain and transfer bitcoin assets to it. Conversely, sidechains assets can also be transferred back to Bitcoin. The mechanism by which Bitcoin assets are transferred to sidechains and back is called Two Way Peg (2WP).

The assets on the sidechains are endorsed by Bitcoin, and are equivalent to Bitcoin in value. At the same time, sidechains design is not limited by the Bitcoin network. Developers can build sidechains through various blockchain technologies, and apply them to all kinds of situations, thus sidechain technology indirectly extends Bitcoin performance and functionality.