By far, the most impactful innovation in the Web3 world this year is the sidechain. The world’s largest blockchain providers – Binance, Polygon, Ankr, and Avalanche – have all recently released sidechain functionality. They are investing hundreds of millions in these new implementations – and with good reason.
Sidechains are the most likely multichain solution to the crypto scalability problem. Several projects have failed or are blocked once they reach a certain level of traffic. Ethereum gas fees are notoriously expensive, while Solana is continually congested to the point where it needs to be shut down. Needless to say, Web3 can only grow if transactions are fast, inexpensive and secure.
Layer 2 (L2) solutions have not solved the problem despite much expectation and implementation. Sidechains are different and might prove to be the best answer as crypto enters mainstream adoption.
What is a sidechain?
A sidechain goes by many different names from different providers. Ankr calls them App Chains; Avalanche calls them a subnet; Polygon calls them a SuperNet. You may also hear the terms parachains, nested blockchains, or application-specific blockchains, which Binance calls application sidechains. Like all things in the world of software development, there are different features and implementations. For example, some sidechains can be equal and interdependent, others in a parent-child relationship where the child takes attributes from the parent.
Related: What Are Parachains: A Guide to Polkadot and Kusama Parachains
However, sidechains offer increased scalability as developers can launch a new blockchain or sidechain to meet a specific function. For example, Avalanche has dedicated chains (X-Chain, C-Chain, P-Chain) for specific purposes. Thus, blockchains can be designed specifically to handle certain types of high-frequency transactions or applications. If one type of transaction is causing all the problems, it won’t block the entire blockchain, just a dedicated sidechain.
The fact is that layer 1 blockchains (Ethereum, Bitcoin, Avalanche, Binance) are not designed for games. This is the only area where scalability issues are highlighted, with games being resource-intensive and requiring high daily transaction volumes. The Crabada game on Avalanche recently increased the cost to $11 per transaction. And changing the initial layer 1 blockchain to cater for Web3 games is not feasible.
Side chain gaps
Sidechains have endless applications and are probably the best option going forward with Web3. But sidechains are all governed by their own set of rules, which aren’t foolproof against bad architecture. Most decentralized applications (DApps) don’t know enough about all the ins and outs of running their own Web3 infrastructure, networks of nodes and validators. These are necessary to process transactions and ensure speed, security and reliability.
Since each sidechain has to manage its own infrastructure, sidechains are usually not as secure as the initial chain (a common misconception). The security features of a strong blockchain are not inherited on a given sidechain. The sidechain has its own consensus mechanism, its own validation fees and its own vulnerabilities depending on the configuration of each developer.
Ronin, a sidechain of Axie Infinity, was hacked for $620 million worth of Ether (ETH) and USD Coin (USDC). Although a clear and obvious failure in terms of network security, the sidechain processed 560% more transactions than Ethereum, meaning it excelled in Web3 scalability despite its security vulnerabilities. Axie chose to have only nine validators, four of which ran everything. It was a clear attack vector that Team Sky Mavis overlooked.
Related: The Future of the Internet: In the Race for Web3 Infrastructure
And this is the biggest pitfall associated with sidechaining: they rely on the skill of DApp developers to manage their own infrastructure. Companies like Ankr have started to solve this problem by offering App-Chain-in-a-Box solutions. Other infrastructure companies will surely follow. The benefits of sidechains far outweigh the security vulnerabilities once the industry sets good standards.
They are the best option for what is known as the blockchain trilemma; when you try to increase performance on the main chain, you do so at the expense of security or decentralization (the triangle being performance, decentralization, and security).
How are side chains different from Layer 2 solutions?
These are new technologies, and many people don’t fully agree on the terms. Some people say that sidechains are a type of L2 solution. But that’s not strictly true. An L2 is an additional “layer” above layer 1. A sidechain is an almost identical implementation of a blockchain but with its own consensus protocols and node infrastructure. It is also modified for specific functions. By this definition, the Ethereum plasma network is not really a side chain, but an L2 (it inherits its security from the root chain and publishes there).
Popular L2 solutions include Bitcoin’s Lightning Network and Ethereum’s Raiden Network. These are best described as state channels, a subcategory of L2. They allow two network participants to transact off-blockchain without needing permission from miners or validating nodes. These are easier to implement and have their place in terms of increasing transaction speed. But they are not as flexible, customizable or fast as sidechains.
For example, a sidechain can allow developers to quickly and easily deploy their own sidechain for a specific purpose. Several test blockchains can be developed to see which perform best. Or different networks can be set up based on user feedback. This is not the case with L2s, which are essentially a band-aid to deal with a scalability issue.
Related: Is there a safe future for cross-chain bridges?
A sidechain is a new chain dedicated to a specific purpose. An L2 is often a patch applied to a failing Layer 1, which does not have the bandwidth to support existing traffic.
Scalability: the main subject of Web3
Many might believe that scalability, security, and decentralization are just development issues that don’t matter. But they go to the heart of global finance and have important implications for everyone. Sidechains and L2s are not just meaningless technical terms, but the architecture on which Web3 will be built and the perfect vehicles for unlimited scalability. And Web3 could be the key to global economic freedom with profound implications for growth across all industries and geographies.
Bitcoin and Ethereum were originally created with an emphasis on security and decentralization, not scalability. In that regard, they were a huge hit, but both are blazingly slow at 7 transactions per second (TPS) and 15 TPS, respectively. Visa, on the other hand, handles around 24,000 GST. For the global adoption of crypto and for Web3 to happen, sidechains are needed. They will ultimately help make 24,000 TPS look like a snail on the sidewalk, which is why some of the world’s largest providers are actively working and promoting them. They might be the best Web3 innovation since smart contracts.
Side chains are the future
The future of Web3 scalability lies in sidechains. This is why Ankr actively promotes this technology and additionally provides the node infrastructure that supports it.
Developers can get a dedicated sidechain for their specific application, potentially solving the blockchain trilemma once and for all. Thanks to ready-to-use frameworks, launching a dedicated blockchain for a specific application will be simple to achieve.
Blockchain easily beats old centralized institutions in terms of security and decentralization. The last remaining pillar is scalability, which can potentially be solved by sidechains.
This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.
The views, thoughts and opinions expressed herein are those of the author alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.
Gregory Gopman is a tech entrepreneur working in the blockchain space where he is the marketing director of Ankr and runs a blockchain consultancy called Mewn that helps launch projects and increase their valuation. Greg has worked in startups for 15 years – 10 years with Silicon Valley tech companies and five years building crypto projects. He is best known for co-founding the Akash Network and AngelHack and helping Kadena grow from $80 million to over $4 billion in 100 days.