Sidechain (side chain) is a method of separating blockchains. Instead of using only the primary blockchain, the user now sends their digital assets to an additional one.
Sidechain is a separate blockchain with a two—way binding to the main blockchain. This ensures the interchangeability of assets with a given intensity. The main blockchain is usually called the "main (parent) chain", additional chains are called sidechains.
The user of the parent blockchain must first send the coins to the outgoing address, where they are "locked" by the participants of the so-called "federation", which is designed to exclude the possibility of spending them elsewhere. Upon completion of the transaction, its participants receive confirmation, however, for additional security, this happens after a certain waiting period. After that, the equivalent amount of coins is transferred to the sidechain, and the user has the opportunity to spend them. When sending coins from the sidechain to the main blockchain, the reverse process occurs.
The sidechain process consists of several stages and takes some time:
The first stage is sending. The user takes his coins and sends them to a special specific address, where they become inaccessible to the original owner.
The second stage is waiting for confirmation. The asset transfer can be completed, but the user needs to wait for official approval. The process may take a certain amount of time, but it is necessary to protect assets.
The third stage is the use of a new sidechain. After confirmation, the coins are issued in the sidechain. Their sum is equal to the original one. From this moment on, the user is ready to work with his assets.
Sidechain can work with different types of digital assets. The user can change them by transferring them from the main chains to sidechains and vice versa.
What is a "federation"?
Federation is a group of operators acting as an intermediary point between the main chain and one of its sidechains. The "Federation" determines when the user's coins are "locked" and when they can be spent.
The disadvantages of such a model are the presence of an additional layer between the main chain and the blockchain and, as a result, the risks of centralization. In January 2017, an updated consensus mechanism and trust model were presented, as well as a description of mechanisms to ensure the return of funds sent to the "parent chain" in case of failure.
Sidechains are responsible for their own security. In the absence of sufficient mining power to ensure security, the sidechain can be hacked. Since each sidechain is independent, if it is hacked or compromised, the damage remains within this chain and does not affect the main blockchain. Accordingly, if the main blockchain is compromised, the sidechain will continue to work, but its binding to the "parent chain" will devalue.
Sidechains need their own miners, which can be stimulated through "combined mining" — simultaneous mining of two separate cryptocurrencies based on the same consensus algorithm.