Sidechains and layer 2 solutions allow for constant and incremental innovation that improves Ethereum for everyone while maintaining security and decentralization. The main difference between sidechains and Ethereum layer 2 solutions is that while layer 2 inherits the security of the main Ethereum network, sidechains rely on their own security. An Ethereum sidechain is a separate blockchain network that runs in parallel to the Ethereum main chain.

Sidechains connect to the main chain via a two-way peg system allowing assets to be exchanged between the chains. There are two basic types of sidechains, one in which a chain is dependent on the other and another where they are independent. When one chain is dependent on another chain like Ethereum, it can be considered the child chain of this parent chain. Source Sidechains have their own consensus protocols that are often designed for specific kinds of transactions and allow them to be faster and more affordable.

Sidechains reduce the congestion on the main chain, reducing the cost for everyone and increasing the usability and scalability of the Ethereum ecosystem. Developers can also use sidechains to explore and test new features and use cases that are not available on the main chain.

Ethereum 2. Sidechains work by connecting to the main chain through a two-way-peg system or bridge. This triggers the release of the same value from a lockbox on the side chain via a smart contract. Layer 2 protocols are chains that live inside the Ethereum chain but are able to achieve greater scalability through a secondary framework.

This reduces congestion on the main layer by having the bulk of activity processed through the second layer. Unlike a sidechain, layer 2 generally inherits the security properties of the main chain. Layer 1 is the base blockchain. Ethereum is a layer 1 blockchain because it is the underlying foundation on top of which various layer 2 blockchains are built.

Simply put, layer 2 compresses bundles of transactions and submits them to the main Ethereum network. Layer 2 scaling solutions include channels, rollups, and plasma. Channels With channels, users transact with one another directly off-chain and reduce on-chain transactions to only the most important information. Specifically, part of the blockchain is locked via a smart contract so that the participants involved in the transaction have to completely agree before updating it.

Participants update the state among themselves by creating and signing transactions that could be submitted to the blockchain. Once you want to stop using the channel, you exit and submit the last state update to the main chain which unlocks the state again. Source 2. Rollups A rollup performs transaction execution outside the main Ethereum blockchain and then batch together multiple transactions before sending them back to the main Ethereum network.

Rollups rely on proofs to allow Ethereum to verify their correctness without processing transactions. There is a better way. Imagine you want to transfer 1 BTC from the Bitcoin network to a sidechain. First, you send a transaction for 1 BTC to a designated lockbox address on the Bitcoin network.

In that transaction, you also include information about the sidechain address you want to send the BTC to. Once the transaction is received by the Bitcoin network and added to the blockchain, the sidechain lockbox releases 1 BTC and sends it to the address indicated in the Bitcoin network transaction. To send the BTC back, you simply reverse these steps.

In crypto, the system to move assets from one chain to another and back through a 2-way peg is often called a bridge. Bridges are not limited to transferring assets; assets can be exchanged too. Bridge architecture can vary greatly. For example there are Powpegs , SPV , federated , and collateralized systems. Scalability: A sidechain can offer faster and cheaper transactions through many optimizations, for example, by moving a certain type of transaction to another chain whose protocol is purpose built for that type of transaction.

This should decongest the first chain, making the first chain faster and cheaper too. Sidechains can also use much faster, newer techniques that are more efficient. Reaching consensus can be slow, if not impossible. Sidechains allow new ideas to be tested and deployed without broad consensus. This experimentation and upgradeability enables many of the efficiencies that contribute to scalability.

Diversification: Assets from other blockchains can be made accessible to more people. Applications such as lending and borrowing in DeFi can gain access to assets from other chains. This is both a positive and a negative. It means poor security in one blockchain does not affect the security of the connected blockchain. However, this means popular blockchains like Bitcoin cannot lend any security strength to smaller, less popular blockchains.

On a related note, sidechains require their own miners. A large pool of diverse miners is an important way most blockchains secure their network. Newer chains must do their best to grow their mining ecosystem, but this can be difficult because newer chains are often less lucrative for miners.

Sidechains can make this even worse, because in parent-child sidechains, the child chain typically does not have its own native coin.

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According to the article: State channels are the general form of payment channels, applying the same idea to any kind of state-altering operation normally performed on a blockchain. The basic components of a state channel are very simple: Part of the blockchain state is locked via multisignature or some sort of smart contract, so that a specific set of participants must completely agree with each other to update it. Participants update the state amongst themselves by constructing and signing transactions that could be submitted to the blockchain, but instead are merely held onto for now.

Finally, participants submit the state back to the blockchain, which closes the state channel and unlocks the state again usually in a different configuration than it started with. A sidechain is a separate blockchain that is attached to its parent blockchain mainchain using a two-way peg. In other words, you can move assets to the sidechain and then back to the parent chain.

Layer 2 sidechains are distributed ledgers which operate independently and in a parallel capacity to the Ethereum mainnet. Security is the responsibility of each sidechain; it is not directly inherited from Ethereum. Sidechains often incorporate alternate validator selection and consensus mechanisms to provide faster transaction times. Sidechains use a variety of validator selection methods to achieve these goals while maintaining security.

Smaller validator sets are more susceptible to collusion-based attacks, so strong incentives must be in place to encourage honest validation and discourage malicious behavior. Examples include: Proof-of-Authority: Validators network nodes responsible for signing transactions and maintaing a consistent ledger are pre-selected for the protocol.

An example is the POA Network. POA uses an Authority Round consensus where selected validators, in this case US Notary Publics with public reputations at stake, take turns signing transactions and sealing blocks. The POA model improves scalability 5 second block times, low transaction fees while sacrificing a degree of decentralization validators are pre-selected and the protocol has a limited validator set.

Proof-of-Stake: A set of validators are selected based on the staking amount they commit to the protocol. Nodes which have placed more stake are more likely to be selected as validators. With delegated proof-of-stake, users can add additional staking amounts to a node, serving to increase that node's likelihood of becoming a validator. An example is the xDai chain , where nodes who commit a higher amount of STAKE the xDai governance token, staked by both validator candidates and delegators into the protocol have a higher probability of selection to a dynamic validator set.

Once selected, staking incentives promote honest validation. Sidechains also rely on different Byzantine Fault Tolerant methods to ensure consensus.

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This increases the possibility of malicious behavior which can affect your users or put their funds at risk. Asset movement In order for a separate blockchain to become a sidechain to Ethereum Mainnet it needs the ability to facilitate the transfer of assets from and to Ethereum Mainnet. This interoperability with Ethereum is achieved using a blockchain bridge. Bridges use smart contracts deployed on Ethereum Mainnet and a sidechain to control the bridging of funds between them.

While bridges help users move funds between Ethereum and the sidechain, the assets are not physically moved across the two chains. Instead, mechanisms that typically involve minting and burning are used for transferring value across chains. More on how bridges work. Pros and cons of sidechains Pros The technology underpinning sidechains is well-established and benefits from extensive research and improvements in design.

Sidechains trade off some measure of decentralization and trustlesness for scalability. Sidechains support general computation and offer EVM compatibility they can run Ethereum-native dapps. A sidechain uses a separate consensus mechanism and doesn't benefit from Ethereum's security guarantees.

Sidechains use different consensus models to efficiently process transactions and lower transaction fees for users. Sidechains require higher trust assumptions e. EVM-compatible sidechains allow dapps to expand their ecosystem.

Use Sidechains. While not likely, this intermediary could technically manipulate transactions as funds pass from the main blockchain to the sidechain. If you have purchased or used Ethereum since mid, you will know that gas fees can be costly.

This was not always the case. Ethereum has many more users now than when it was originally launched. The congestion on the network causes slow processing times and high fees. Sidechains offer an effective way to increase the capacity of the network.

However, there are some tradeoffs. Exponential Growth Sidechains have grown along with Bitcoin and Ethereum. Polygon was launched in and has benefited from Ethereum becoming the preferred blockchain of NFTs , DeFi , and other applications. On its own Ethereum can process roughly 12 to 30 transactions per second.

The Polygon blockchain increases throughput to nearly 10, transactions per second. There are a plethora of sidechains out there other than just Polygon. Each one has unique qualities that differ from the other. Some help facilitate the rising application of blockchains in gaming and social media utility like Loom. Rootstock is the main sidechain that helps scale Bitcoin. Plasma has become a favorite of developers in the world of decentralized finance apps dApps.

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