Spotlight on: Sidechains

Wednesday 15 July 2015

If you’ve been in the bitcoin space a while you’ll have heard of sidechains… and probably not understood them. What’s all the buzz about?

Bitcoin has a vast and well-secured network. Its several years of head-start over even the oldest altcoins means it’s going to be a long time, if ever, before it’s surpassed. It remains the king, and will for many more years.

Read also: 8 MB blocks? Sold!

And yet there are things bitcoin cannot do. It’s good at transferring money securely and cheaply, but that’s all it does - and with 10-minute blocks, it’s a little slow. The alts are a sandbox for development where we see incredible innovation, but two things are clear. None of them have a shot, in the medium term, of attracting the interest bitcoin has. And bitcoin, with its lumbering development process and political wrangling, will never implement those innovations for itself.


A two-way link between chains could open a lot of new possibilities

Sidechains are, in effect, a way for bitcoin to have its cake and eat it. They’ve been dubbed ‘the altcoin killer’, because they give the granddaddy of virtual currencies a way to co-opt ideas from other protocols and use them for itself. But don’t worry - they’re some way off, and the road to sidechains is fraught with problems.

Lock up your coins

The idea for sidechains is that coins can be sent to a special address, where they will be ‘locked’ and cannot be withdrawn, while their value is transferred to a different chain - which has different properties. It may have faster transactions, great anonymity, coloured coins: it doesn’t matter. You get to use an equivalent amount of money within the sidechain, and your bitcoins are only unlocked and returned to you for withdrawal when certain conditions are met in the second chain (such as those coins are sent back to the issuing address). So there’s a two-way peg system that enables transfer between the chains, but only allows one lot of value to be used at a time.

The advantages of this are that it maintains the most useful feature of bitcoin, its network effect, but adds other features without actually tinkering with the core bitcoin code. The alts are a great playground for innovation, but make a mistake in the code and the whole network grinds to a halt: not something you want to do with a $4 billion market cap system.

The disadvantage is that it may take a one-off change to the bitcoin protocol to set it up, and we know from the blocksize debate just how controversial any changes to the bitcoin code are.

So sidechains, if they ever happen, are some time away. And all the while the best alts are innovating, gaining use cases and attracting users. TL;DR? Sidechains might be useful once they happen, but don’t hold your breath.

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