Sidechains have been floating around for some time now as an idea. The rundown is to have a distributed ledger that is running along with the imperative distributed ledger. This lets you as a user to move tokens and similar digital assets from the key blockchain to the side one, and the other way around. Picture them as extensions to the distributed ledgers already in place that can bring up their usefulness. We’re gonna tackle how sidechains operate, and we’ll then look into a couple of the most important sidechains now operating on BTC’s distributed ledger – RSK and liquid.
How do Sidechains operate?
The sidechain is connected via a bidirectional peg to the key distributed ledger. You get rid of other tokens, such as Bitcoin, in a one-way peg, and you receive a certain amount of currency in exchange for doing so. So, for instance, in Counterparty – a P2P financial network based on BTC – by sending it to a non-spendable address, you “burn” a certain number of Bitcoins. You get a few native XCP tokens in exchange. This is a non-reversible procedure where you cannot get back the original BTC.
You build a two-way peg when it comes to sidechains, which renders this entire procedure one you can reverse.
And the mechanism works like this:
- Rather than burning them, you lock up some BTCs.
- You lock up the Bitcoins in boxes not belonging to some address, which is not regulated by Federations.
- Then, you will be getting a set number of freshly-generated tokens on the sidechain when you block up your Bitcoins.
- You then communicate, the way you want, with these fresh tokens.
- After you’ve achieved this, getting back an equal sum of BTC may destroy the remaining tokens and switch to the key distributed ledger.
What are Feds?
As these chains deal with loads of capital, a safe and trustworthy layer amid the blockchain and sidechain is necessary. The problem is that the BTC script is not sufficiently sophisticated to fully decentralize this operation. By implementing a multi-signature m-of-n, we may make a Federation that does not ask for trust amid its members to operate. Blockstream’s Liquid has a federated peg that utilizes an exchange consortium.
Consider a 5-of-7 multi-sig contract, where m=5 and n=7, to comprehend the way those multi-signatures operate. All this simply means is that it goes through in a 7-member Fed if 5 approve a specific plan.
Safety in Sidechain
Are sidechains as safe as the main distributed ledger, then? Not really, but some measures can be undertaken to ensure the protection is good enough. Let’s look at what Rootstock is doing in that way.
According to Rootstock, Proof of Work is the lone consensus mechanism that provides proper finality. The explanation is that it is the only consensus mechanism that actually uses essential energy (electricity). To draw miners into their network, Rootstock promotes them via a method named “merged mining”. Two different cryptos are mined concurrently in merged mining, based on the same algorithm.
Rootstock utilizes a block reward sharing method known as “DECOR+” to minimize rivalry and let miners switch late to the best block in Rootstock.
Rootstock incorporates federated checkpoints for Proof of Work mined blocks to stop the chances of a 51 percent attack, particularity in the early days. Members and clients of the Fed sign federated checkpoints may utilize most signatures to decide which chain is the best.
Despite all these measures, if Rootstock’s mining power goes under 5 percent of the hashing power of BTC, then the Fed will have the authority to create signed blocks. Furthermore, if Rootstock’s hashing capacity reaches 66 percent of the max Bitcoin hashing difficulty, you as a user can avoid utilizing the federated checkpoints.
Now that we got acquainted with the basics, let us look into the two most popular sidechains on top of BTC’s network.
Sidechains on Top of BTC’s Network: RSK & Liquid
Rootstock (RSK) is a smart contract platform via sidechain tech, which is connected to the BTC distributed ledger. It was made as compatible with the apps of Ethereum (the web3/EVM/Solidity model), but using BTC as the crypto underlying it. The notion behind RSK’s creation was to provide smart contract functionality for the BTC distributed ledger. Rootstock is a combo of:
- A Turing-complete resource-accounted virtual deterministic machine can go along with ETH’s EVM (for self-executing contracts).
- A two-way pegged BTC sidechain, founded on a strong federation for Bitcoin denominated trade
- A SHA256D merging and mining consensus method (counting on BTC miners for consensus security) with a block timeframe of thirty sec (for prompt payments).
Causes for Creation
There are many benefits of the BTC distributed ledger. With proven safety, vast distributing, and awareness – it’s long-running. Moreover, it has a healthy community with robust hashing abilities. RSK wishes for users to bask in BTC’s advantages as a store-of-value while offering self-executing contract functionality and increased scalability.
The Rootstock chain is linked to the BTC distributed ledger through a two-way peg. As a user, you can lock up your Bitcoin and receive an equivalent number of RBTC in the side-chain. Such coins may be utilized to deploy or interact with smart contracts and dApps on the Rootstock distributed ledger. The RSK Federation can secure the RSK Two-way Peg and block consensus is made sure of via mining via merging.
The RSK sidechain consists of fifteen active functionaries and requires 8 signatures to unlock Bitcoins. The sidechain utilizes custom Hardware Security Modules (HSMs) to store private keys, and functionaries from the RSK federation can audit both firmware and hardware from the HSMs.
In the RSK sidechain, the native token is RBTC. RBTC can not be pre-mined, minted, and RSK inflation does not occur. Such a two-way peg amid BTC distributed leverage and RSK distributed leverage ensures a fixed Bitcoin/RBTC exchange occurs. (One RBTC amounts to one Bitcoin). The procedure of converting Bitcoin to RSK is:
- The sender has to ensure the BTC are locked in a P2PKH address in order to be transferred. If not, then in a transaction Tx1, they need to be transferred to a P2PKH address.
- In a Tx2 transfer, the BTCs are moved from the P2PKH address to the Federation’s multi-sig address.
- After the Federation has validated this transaction, the distributed leverage will automatically unlock the equivalent amount of RBTCs to an address regulated by the sender.
We’ve previously focused on merged-mining, so let us explain it a bit more.
- While the mining procedure goes on, the main distributed ledger (BTC) will find in it embedded the cryptographic hash of a freshly-mined block from the sidechain (RSK).
- A merged-mining “tag” prefixes the side block hash. This tag is a short descriptive text known as “magic bytes.”
- A block from the mainchain can just be connected with a max of one block from the RSK distributed ledger. This ensures that there’s no confusion when talking about tag locations.
- The key security requirement for merged-mining is that a key-blockchain block connected with two blocks from the same secondary distributed leverage has to be harder to make than mining two different key-distributed-leverage blocks.
There’s one unique part on RSK’s web page about merge-mining describing the opportunities for miners.
Within the RVM, the smart contracts are executed in RSK. RVM’s principal features are:
- The RVM is well-matched with EVM at the op-code level, which means it has the ability to execute ETH contracts.
- With the security of the BTC distributed ledger, users are in the position to run ETH decentralized applications. Having the cake and eating it, too, basically.
- The RSK community will continue to suggest a pipeline for performance-improvement recorded in lots of RSKIPs.
This is a great way RSK applied. Rather than developing their proprietary method of communication and pressuring developers to work in some way, they’ll let them build decentralized applications by utilizing the most common smart contract way of communicating (Solidity).
Rootstock utilizes a conceptual development program (RSKIPs) powered by the community. RSK’s initial white paper talked about a long-term governance model that targets to represent all the community’s actors, offering a governance five-member board:
- Miners could vote with hashing power (1 vote)
- Users of Bitcoin and Rootstock shall vote with Proof-of-Stake (1 vote)
- Exchanges and web-wallets can vote by Federation participation (1 vote)
- Rootstock and BTC Core developers should have a specific starting voting method (1 vote)
- A non-profit founded BTC organization can be given the last vote, which can represent the biggest ecosystem. An institutional vote to standardize the EVM/Solidity/Web3 toolchain can be provided to the organisation.
RIFOS – A layer over RSK
On top of RSK is a layer of RIFOS tech. You can picture RIFOS as a decentralized AWS and a “third layer.” Developers may utilize RIFOS to bring into the BTC distributed ledger lots of fun characteristics that would’ve been impossible to do prior to that. RIFOS developers are currently operating on service applications for Storage, Payment, and Naming. Here are some details on RIFOS:
- As long as a product is compliant with the underlying guidelines, developers can integrate it with little trouble in the RIFOS ecosystem.
- All of the individual RIFOS parts were made to max potential advantages for those who wish to provide their infrastructure services in the protocol’s ecosystem.
- The protection offered by the BTC Network protects all of the parts.
- Its protocols should count in ways to jumpstart network effects and economies for comparison.
- The bulk of the services operating in RIFOS are accessed using a single token.
Liquid was one of the initial BTC sidechains for commercial use. Made by Blockstream, by letting lighting-fast transfers of money amid Exchange platforms, Liquid assists in mitigating BTC’s scalability issues. The native token is named Liquid BTC (LBTC) set at 1:1 with Bitcoin.
The Liquid sidechain’s principal benefits are:
- Transfers amid Exchanges, Marketplace Makers, and some wallets are quick.
- Seeing how sidechains will let you transfer big volumes of money, more useful trading operations are possible.
- Liquid is immune to transaction analysis methods that make it more private than the BTC distributed ledger.
- The blocks of liquid are programmed to be 1-min apart which makes it very trustworthy.
- Liquid Federation is operated by reputable institutions that have to function in the system’s interest to avoid any reputational harm on the marketplace.
Who’s in Liquid’s Fed?
The Federation has a community of exchanges, traders, and financial institutions spanning four continents and 9 nations. The Federation currently has thirty-five members now, and some of them are:
BTCBOX, Cobo, Coinone, FRNT Financial, Gate.io, GOPAX, Huobi, L2B Global, OKCoin, OpenNode, Poolin, TaoTao, Tilde, Unocoin, and Zaif.Bear in mind that this network is run by members of the Fed.
Blockstream holds no ruling over the Liquid network – this is something the Federation members do.
How do BTC-to-LBTC transitions occur?
This is how the transfer occurs:
- Liquid users move BTC to a Fed-backed address.
- The users are credited with LBTC the moment this transfer gets 102 confirmation.
- To ensure that the network retains liquidity, each Liquid participant has to hold a part of the funds as LBTC.
Sidechains on Top of BTC – Final Word
Sidechains are among the crypto-novelties that are most buzzworthy. Only a while ago, making decentralized applications on top of Bitcoin would have been just a concept. We currently have implementations such as SegWit, Liquid, and RSK, rendering BTC exponentially more scalable and also programmable. Due to such implementations, it will be interesting to see what kind of apps developers can create on top of BTC.