Foreword

As the largest decentralized blockchain network supporting smart contracts, Ethereum can provide various decentralized applications and services. However, as the number of users increases, Ethereum faces challenges such as slow transaction speed, high fees, and limited scalability. To address these issues, many developers and project teams have adopted sidechains, which involve establishing one or more parallel blockchains outside of the Ethereum Mainnet and interacting with the Mainnet through certain mechanisms.

Sidechains can design their own consensus algorithms, transaction rules, security mechanisms, etc., based on different needs and scenarios, thereby improving efficiency, reducing costs, and increasing flexibility. By integrating with the Ethereum Virtual Machine (EVM), sidechains can maintain compatibility and interoperability with the Ethereum Mainnet.

Currently, the average transaction throughput of the Ethereum Mainnet is only 15 transactions per second, while traditional payment companies like Visa can handle thousands or even tens of thousands of transactions per second. By utilizing sidechains, Ethereum is expected to significantly enhance its throughput. In this lesson, we will introduce the basic concepts, principles, and types of sidechains, and analyze the role and challenges of sidechains in the Ethereum ecosystem.

How Sidechains Work

• Consensus algorithms
  A sidechain is a blockchain that runs outside the Ethereum Mainnet and allows for the exchange of assets and data with the Mainnet. Depending on its specific needs and objectives, a sidechain can establish its own dedicated consensus mechanism and rules to enhance scalability and efficiency, reduce the burden on the Mainnet, and lower transaction costs, all without affecting the Mainnet.

Currently, Ethereum utilizes the Proof of Stake (PoS) consensus mechanism. However, sidechains have the flexibility to choose alternative consensus algorithms that best suit their needs. Commonly used consensus algorithms for sidechains include Proof of Authority (PoA), Delegated Proof of Stake (DPoS), Proof of Stake (PoS), Proof of Work (PoW), or hybrid models.

Different consensus mechanisms are often adopted to improve the block generation speed and throughput of sidechains. The block parameters of sidechains, such as block size, block time, block rewards, and difficulty adjustments, are often set differently from the Ethereum Mainnet. These parameters have significant impacts on the performance and economic models of the blockchain and can also affect the compatibility and balance between different blockchain networks.

• Block parameters
  The Ethereum Mainnet typically has conservative block parameter settings, such as slower block times and smaller block sizes, to ensure the decentralization and security of the blockchain. In contrast, sidechains often adopt faster block times and bigger block sizes to achieve higher throughput, faster transaction speeds, and lower transaction costs.

However, this approach may harm the decentralization and security of the sidechain. Fast block times and big block sizes can increase the difficulty of running full nodes, leading to a small number of “supernodes” being responsible for securing the chain. In such cases, there is an increased possibility of collusion among validating nodes or malicious attacks against the chain.

• EVM compatibility
  Some sidechains are designed to be EVM-compatible and are able to execute smart contracts deployed on the Ethereum network. They can directly leverage the Ethereum ecosystem and development tools, and support smart contracts written in Solidity, as well as other EVM smart contract languages.

For developers looking to expand beyond the Ethereum ecosystem, sidechains serve as an effective scalability solution, which can reduce transaction costs and enable faster execution of decentralized applications.

However, using sidechains also entails certain risks. Each sidechain is responsible for its security and doesn’t inherit Ethereum’s security properties. Therefore, sidechains are more susceptible to malicious behaviors or other attacks.

• Asset transfer
  To become a sidechain to Ethereum Mainnet, the blockchain should be able to facilitate asset transfer from and to Ethereum Mainnet. This 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, allowing them to communicate and exchange data with each other.

When using a bridge, assets are not physically transferred from one blockchain to another. Instead, a mechanism of minting and burning tokens is employed. The assets sent to the bridge smart contract are locked and received by relayers responsible for verifying user transactions. After undergoing security checks, a receipt known as “Simple Payment Verification” (SPV) is generated, and the cross-chain transaction is forwarded to the destination chain. On the other end of the bridge, equivalent tokens are minted.

This method of transaction is also known as a “two-way peg”, which can easily transfer assets by staking and unlocking equivalent assets on different chains through smart contracts.

Image source: Web3 University

Advantages of Sidechains

• Alleviating congestion on Ethereum
  Sidechains can alleviate the burden on the Mainnet, improving the overall throughput and efficiency of the blockchain system.

• Supporting different consensus mechanisms
  Sidechains can use different consensus mechanisms to provide customized service applications.

• Offering enhanced privacy
  Sidechains can employ more advanced encryption technology to protect the privacy and security of transactions.

• Enabling greater interoperability and composability
  Sidechains can be scaled horizontally and vertically, creating a multi-chain ecosystem that facilitates better interoperability among different blockchains.

• Open up more opportunities for application expansion
  EVM-compatible sidechains allow dApps to expand to other blockchain networks, fostering a larger user community.

Disadvantages of Sidechains

• Lower security
  The security of sidechains depends on the consensus mechanism and the number and quality of validators. If the consensus mechanism is weak or the validators are untrustworthy, the sidechain may be vulnerable to attacks or failures, leading to data loss or tampering.

• Compatibility issues
  Sidechains and the Mainnet may use different block structures, smart contract languages, state transition rules, etc. This can result in errors or failures in asset transfers or contract executions.

• Availability limitations
  Sidechains can be affected by network delays, node offline issues, or congestion in cross-chain bridges, preventing users from sending or receiving transaction data in a timely manner.

• Centralization risks
  Sidechains typically operate independently of the Mainnet and have their own consensus mechanisms and validators. If the majority of validators are concentrated in a few institutions or individuals, the trustworthiness and security of the sidechain may be compromised.

• High development complexity
  Sidechain networks have many parameters that differ from the Mainnet, requiring consideration of compatibility, load balancing, performance bottlenecks, and potential issues that may arise during usage, necessitating higher technical expertise.

Leading Sidechain Projects

• Polygon
  Polygon blockchain is one of the popular Ethereum scaling solutions, using the PoS consensus mechanism to enhance the efficiency and scalability of blockchain networks. It achieves this by creating multiple parallel chains, also known as child chains, which are connected to the Ethereum Mainnet and can customize their security, governance, and consensus mechanisms.

Polygon’s main advantages include reducing transaction costs, improving transaction speeds, and supporting a wide range of use cases while maintaining compatibility and interoperability with Ethereum. Additionally, Polygon is an open platform where any developer can create and deploy their own child chains or parallel chains.

As an Ethereum sidechain, Polygon provides fast, cost-effective, and secure on-chain transactions, and its multi-chain scaling consensus model enables interoperability and integration of dApps across different chains.

Polygon has made significant progress recently, including the introduction of Polygon zkEVM, a scalability solution for the Ethereum Virtual Machine (EVM) using zero-knowledge (ZK) proofs. It features EVM equivalence, security, and lower cost through batch processing of transactions. Further, it uses Polygon Zero technology, which is currently the fastest ZK-proof in the world, providing better finality than other Layer 2 solutions like optimistic rollups.

Polygon zkEVM is open-source and has released the public testnet. Venture capital firm Seven Seven Six has also launched a $200 million initiative to support the development of new projects with Polygon. Currently, Polygon has become the second-largest GameFi blockchain, with over 130,000 daily active gamers.

• Skale
  Skale blockchain is a project focused on Ethereum sidechain development. It utilizes the PoS consensus mechanism and employs a unique approach called Elastic Sidechains to achieve high performance while maintaining compatibility with the Ethereum blockchain. Skale provides efficient, secure, and cost-effective infrastructure for dApps and smart contracts.

Since its mainnet launch in June 2020, Skale has gained popularity among developers and users seeking scalable and efficient solutions for decentralized applications. The key feature of the Skale network is the use of Elastic Sidechains, which are essentially independent blockchain networks connected to the Ethereum Mainnet. Developers can create and customize these sidechains according to their needs to support various dApps and smart contracts.

The Skale network offers additional functionalities and benefits for developers and users. For example, it supports multiple programming languages and frameworks, making it convenient for developers to build and deploy their dApps and smart contracts. Additionally, it provides low transaction fees and fast transaction times, offering a cost-effective and efficient solution for users.

In terms of tokenomics, the Skale network uses SKL as its native cryptocurrency, with a total supply of 4 billion tokens. A significant portion of the token supply is allocated towards the development of the ecosystem and rewarding the community.

• Gnosis Chain
  Gnosis Chain, formerly known as xDai Chain, is an Ethereum sidechain project that aims to provide a highly scalable, secure, and interoperable blockchain solution for dApps. Gnosis Chain supports transaction speeds of up to 1,000 TPS (Transactions Per Second) and employs PoS consensus mechanism and smart contract verification for network security. Additionally, Gnosis Chain is compatible with the Ethereum network, enabling interoperability with the Ethereum ecosystem.

Recently, Gnosis Chain has made significant technological advancements. Firstly, it has introduced a new version with improved features such as faster transaction speeds and enhanced security. Additionally, Gnosis Chain has collaborated with Polygon, integrating the Gnosis Safe wallet into the Polygon network to achieve faster transaction speeds and lower fees. Lastly, Gnosis Chain has partnered with DeFi insurance company Nexus Mutual to provide insurance services for Gnosis Safe wallet.

The xOmniBridge technology allows for cross-chain asset transfers between Gnosis Chain and other networks such as Ethereum and Binance Smart Chain. This enables users to transfer assets between different networks without relying on centralized exchanges. Currently, many Ethereum applications such as Chainlink and Aave have migrated to Gnosis Chain, which enjoys a well-established ecosystem that incorporates DeFi protocols, gaming, and NFT marketplaces.

Conclusion

In this lesson, we have explored the application of sidechain technology in scaling the Ethereum blockchain. Sidechains are independent blockchains that run in parallel with the Mainnet and interact with it through specific mechanisms for data exchange and asset transfers, enabling scalability and application support for the Mainnet. Sidechains have the potential to improve transaction speed, reduce costs, and support diverse application scenarios, bringing more innovation possibilities to decentralized applications. However, they still face some limitations and challenges in terms of security and decentralization.

In addition to Polygon, Skale, and Gnosis Chain, there are other projects, such as Loom Network, Metis Andromeda, and CrossBell, that are actively developing sidechains. Through this lesson, you may have gained a considerable understanding of sidechains. In the next lesson, we will explore the highly anticipated Rollups technology and delve deeper into diverse Ethereum scalability solutions.

Highlights

• Ethereum faces scalability issues and needs to address transaction speed and cost issues. Sidechain technology is one solution.
• Sidechains are independent blockchains that run in parallel with the Mainnet and enable data exchange and asset transfers through specific mechanisms, achieving scalability and application support for the Mainnet.
• The advantages of sidechains include alleviating congestion on the Ethereum blockchain, supporting different consensus mechanisms and block parameters, providing higher privacy, supporting more interoperability and composability, and opening up new possibilities for applications.
• The disadvantages of sidechains include lower security, compatibility issues, limitations in availability, centralization risks, and higher development complexity.
• Polygon, Skale, and Gnosis Chain are well-known sidechain projects.