While it is commonly believed that Sidechains and Layer 2 solutions are designed to scale Bitcoin and Ethereum using different technical methods, there is a deeper understanding of the purpose of sidechains.
While it is true that sidechains can improve the performance of the main networks, their structure and capabilities go beyond scalability.
They provide a flexible mechanism for experimentation, allowing for the testing of new transaction designs, alternative trust elements, and exotic consensus algorithms. Sidechains can be optimized for specific use cases, making them applicable to various industries that require fast computation and processing speeds. Additionally, sidechains can be used to test new features that can later be added to the main blockchain. All of these unique properties are derived from the nature of the sidechains themselves.
Sidechains are distinct blockchains that operate with their own protocols and consensus mechanisms. They also rely on their own security systems, which sets them apart from other blockchain solutions.
Despite their autonomy, sidechains can interact with the parent (base) network through a two-way peg system, which serves as a tool for moving cryptocurrencies and tokens between the sidechain and the main network. No actual transfer of digital currencies takes place. When a transfer request is made from the sidechain to the base chain, the digital currency is secured in the main blockchain and then activated in the sidechain upon confirmation of the transaction via a smart contract.
So, sidechains boast another important feature - interoperability, which refers to their functional compatibility. Essentially, they can act as intermediaries between two large-scale blockchain ecosystems, ensuring their interconnectivity and transforming into a multichain.
On the other hand, Layer 2 blockchains are built on top of the base blockchain (Layer 1) and are auxiliary components that only partially work independently. The main task of Layer 2 solutions is to relieve the load on the main network, thereby stabilizing its scalability.
Layer 2 solutions include:
- state channels;
- plasma chains;
- rollups, which are of two types: Optimistic Rollups and Zk-Rollups.
Layer 2 solutions offer reduced transaction fees, increased transactions per second, and load balancing, among other benefits. However, unlike sidechains, their functionality is limited by the main blockchain and so there is no place for an experiment.
Therefore, sidechains are better suited for exploring additional functional capabilities of blockchains, while Layer 2 solutions excel at scalability. Another important difference between the two approaches lies in the fact that the security of sidechains depends on their own mechanisms, while Layer 2 solutions rely on the consensus algorithm of the base network.
How did sidechains come about?
Adam Back, a British cryptographer, first proposed the concept of sidechains in 2014 with his article "Enabling Blockchain Innovations with Pegged Sidechains." The development and implementation of the idea were later taken up by the company Blockstream, which was founded by Adam Back and Bitcoin Core developers.
In 2018, Blockstream introduced the first Bitcoin sidechain, the Liquid Network, which serves for inter-exchange settlements and facilitates faster and more secure digital asset transfers. Since then, other Bitcoin sidechain projects have emerged, such as RSK, which is focused on DeFi.
Some popular Ethereum sidechains include Fuse Network, Moonbeam, Skale, and Gnosis.
The brains behind L2 blockchains: Who are they?
In 2015, developer Jeff Coleman presented state channels as the prototype of Layer 2 blockchains. In his article, Coleman outlined a method of conducting transactions off the main network that would eliminate risks for all parties involved. So, the first prototype of the L2 blockchain emerged.
Back in 2017, blockchain pioneers Vitalik Buterin and Joseph Poon proposed plasma chains, a groundbreaking framework for creating sidechains that deliver lightning-fast transaction execution and lower fees, all while maintaining the security and reliability of the main blockchain.
Barry Whitehat introduced rollups in 2019 as a method of compressing multiple transactions into a single unit and sending it to the main chain for verification.
When it comes to second-layer blockchains, Lightning Network is the reigning champ for Bitcoin. But in the world of Ethereum, there are plenty of contenders vying for the top spot. Optimism, Polygon, Arbitrum, and a host of others are all in the mix, each offering unique features and benefits.
