Sidechain

A sidechain or pegged sidechain enables bitcoins and other ledger assets to be transferred between multiple blockchains. This gives users access to new and innovative cryptocurrency systems using the assets they already own. By reusing Bitcoin's currency, these systems can more easily interoperate with each other and with Bitcoin, avoiding the liquidity shortages and market fluctuations associated with new currencies. Since sidechains are separate systems, technical and economic innovation is not hindered. Despite bidirectional transferability between Bitcoin and pegged sidechains, they are isolated: in the case of a cryptographic break (or malicious design) in a sidechain, the damage is entirely confined to the sidechain itself.

Discussion

A sidechain is a mechanism that allows you to move your bitcoins to another, completely independent blockchain, trade them there, and they can then be moved back to main bitcoin blockchain I will try to explain how it should work:

You may have already encountered the idea of a one-way peg. This means that you destroy some BTC, and you gain some other currency for doing that. Example: when Counterparty started, people could “burn” some of their BTC by sending them to an unspendable address, and for doing it, they received newly created XCP tokens. This is called a one-way peg, and it cannot be reversed. You can only move the money one way, you cannot turn it back to BTC later.

Sidechains extends this idea, and creates a two-way peg, that lets you move it back and forth. Instead of destroying BTC by making them unspendable, you lock them in little boxes. These boxes do not belong to any address, they are instead controlled by a bitcoin script. For each box you lock this way, you get newly created tokens on the sidechain (which is another blockchain, complete separate network). You can then give these tokens to someone, pay with them, and when he wants to bring them back to the Bitcoin blockchain, he can just destroy the tokens in the same way. Providing a cryptographic proof that he destroyed the tokens will allow him to open a locked box and collect the Bitcoin.

So the value is pegged, because you can freely turn one into the other at any time.

The purpose of this trick is to allow people to safely experiment with different rules, networks and consensus mechanisms, that may be suitable for different purposes, without putting the main Bitcoin network at risk. In other words, it creates an area where you can bring some of the BTC you have, try some crazy experimental stuff, and then bring them back.

External links

• https://blockstream.com/sidechains.pdf