Get the weekly summary of crypto market analysis, news, and forecasts! This Week’s Summary The crypto market ends the week at a total market capitalization of $2,17 trillion. Bitcoin continues to trade at around $62,300. Ethereum experiences no changes and stagnates at around $2,400. XRP is down by 2%, Solana by 1%, and Dogecoin by 3%. Almost all altcoins are trading in the red, with very few exceptions. The DeFi sector decreased the total value of protocols (TVL) to around…
Bitcoin Sidechains: What Are They and How do They Work?
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So far, Bitcoin is the top contender in the cryptocurrency market, with a net worth of approximately 350 billion USD. It has a robust network strengthened by its decentralized nature. Using a peer-to-peer network under cryptographic protocols enables the undertaking of transactions globally.
However, this crypto giant network has a few limitations that sidechains help solve. Some of these limitations are slow transactions per second, higher transaction costs, scalability issues, and slow network evolution compared to traditional transactions with fiat currency. Thanks to sidechains on top of the Bitcoin network, we can restate some of these problems.
What are Sidechains?
To better understand what this article will entail, let us define what sidechains are. You can think of it as two parallel lines. In this case, the main Bitcoin blockchain and another blockchain (the sidechain). You can transfer tokens and assets from the main blockchain to the sidechain and back if needed. Sidechains act as branches of the leading blockchain rendering them more efficient.
Sidechain ideas have been around since the end of 2013. Safe to say, they are a crucial development in the evolution of blockchain technology. First, it is essential to note that sidechains are independent of the main blockchain. Nonetheless, they can interact with the main blockchain through two-way pegging without third parties. The process depends on the exchange rates of the parent Bitcoin blockchain.
How Do Sidechains Work?
Here is a simple explanation of how sidechains work. For starters, there is the leading chain from which you transfer funds. As a user, you must have an output address to transfer the funds to temporarily. Afterward, the funds are unusable while in this address. Confirmation of the transfer travels through the chains with a waiting period. The waiting period is to ensure additional security of the transfer.
At the end of the waiting period, the same number of coins sent from the main blockchain is what you get in the sidechain. Now, you can freely use the coins in the sidechain. The vice versa happens if you want to transfer funds from the sidechain to the main blockchain.
Federations are the intermediaries between the main blockchain and sidechains. They decide when to lock and release the user’s coins. It is up to the sidechain’s designer to choose who/what is in the federation. A downside to having federations is that they add an extra layer between the main blockchain and the sidechains, bringing about centralization possibilities.
As they are independent, sidechains are liable for their security and depend on their miners. Without extensive mining, they are prone to hacking. If this happens, any compromise that occurs to the sidechain does not affect the main blockchain. Likewise, a compromise to the parent blockchain does not affect the sidechain through the functionality of its merging to the main chain lowers.
Bitcoin Sidechains
Liquid
Liquid is a Bitcoin sidechain that speeds up Bitcoin transactions and enables digital asset proceeds. The launch of the network happened in October 2018. Liquid transactions in the past were available to anyone. Later, the network introduced confidential transactions to secure information exchange and trading.
For digital asset proceeds, Liquid allows for the issuance of cryptocurrencies by anyone. It varies from digital collectibles and altcoins to assets. It also supports creating security tokens for tradable financial instruments. Furthermore, it provides the essentials for creation.
The network has a functionary that acts as the block signer and guard. Block verification in the network requires two-thirds of the block signers’ acceptance. In terms of the guard, it ensures the security and management of the network’s coins.
Coins transferred to the Liquid sidechain become Liquid Bitcoin. The transfer of Bitcoin to the Liquid network is peg-in. As the Liquid user, you send Bitcoin from the main blockchain to a peg-in address. After that, you wait for 102 confirmations, freezing the Bitcoin wallet and activating the Liquid Bitcoin wallet. The reverse process is peg-out, and vice versa happens.
Rootstock (RSK)
Rootstock is a Bitcoin sidechain that enables smart contracts, which improves Bitcoin’s main blockchain. Rootstock developed from QixCoin, a Turing complete cryptocurrency, where the latter came into existence in 2013. Rootstock itself was launched in 2017. Rootstock uses Smart Bitcoin for the network, which engages smart contracts and dApps. Rootstock can reward miners with a two-way function and have a platform for smart contracts.
Like in every other sidechain, once users transfer currency from Bitcoin’s main blockchain, they receive the same amount as Smart Bitcoin in the Rootstock sidechain. Therefore, it offers no transaction fees for these processes.
Rootstock allows for flexibility lacking in Bitcoin, supporting transactions through Smart Bitcoin, faster transactions, fast transaction confirmations, smart contracts, and secure exchange. All these features come with no risk of decentralization of the sidechain.
Benefits of Sidechains
Increase Flexibility
Sidechains are enabling Bitcoin in terms of expanding transactions. More transactions per second faster than in the main blockchain provide a reliable platform for Bitcoin users to trade. In addition, sidechains are further providing other features, such as smart contracts for users widening the scope of what you can do within the Bitcoin blockchain.
Confidentiality
Most Bitcoin users find the availability of their transactions to everyone a disadvantage. For those who want more privacy of that information, sidechains like Liquid are providing a policy that ensures private transactions.
Efficiency
Sidechains enable large transactions of both currency and assets. Sidechains eliminate limitations that may come with the main Bitcoin blockchain in transferring funds and assets. The heightening of the Bitcoin system is, thus, nigh. Furthermore, the low transaction rates that come with the sidechains are more inviting and affordable for users.
Author’s Note
As much as the Bitcoin network is reliable, it comes with a few discrepancies. Therefore, the development of sidechains is a welcome introduction to the blockchain party. The large Bitcoin and cryptocurrency networks will gain significantly with the extensive features offered by sidechains.
Btc
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$62.547
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For lower transaction fees and higher transaction rates, users gain a reliable platform for trade and more. Sidechains are revolutionizing the crypto world as much as some may conclude it is a long shot.
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