Overview
A sidechain is a separate blockchain that runs alongside Bitcoin and is connected to it via a two-way peg mechanism. Bitcoin can be "moved" to the sidechain (locked on the main chain and represented on the sidechain) and later moved back. This allows sidechains to experiment with different features, trade-offs, and capabilities without modifying the Bitcoin protocol itself while still deriving value from bitcoin as the native asset.
Two-Way Peg Mechanism
Bitcoin Mainchain Sidechain
┌──────────────────┐ ┌──────────────────┐
│ │ Peg-In │ │
│ Alice locks │ ──────────> │ Alice receives │
│ 1 BTC in │ │ 1 sBTC on │
│ special output │ │ sidechain │
│ │ │ │
│ │ Peg-Out │ │
│ Alice reclaims │ <────────── │ Alice burns │
│ 1 BTC on │ │ 1 sBTC on │
│ mainchain │ │ sidechain │
│ │ │ │
└──────────────────┘ └──────────────────┘
The total supply is conserved:
BTC locked = sBTC circulating
Types of Sidechains
Federated Sidechains
A federation of known entities (companies, organizations) collectively manages the peg using a multisig arrangement. The federation validates sidechain blocks and controls the release of bitcoin back to the main chain. Liquid Network by Blockstream is the most prominent example.
Drivechains
A proposed mechanism (BIP300/BIP301) where Bitcoin miners validate sidechain withdrawals. Drivechains would allow permissionless sidechain creation without requiring a trusted federation, but they require a Bitcoin soft fork to implement and remain a topic of active debate.
Merged-Mined Sidechains
Sidechains where Bitcoin miners can simultaneously mine the sidechain blocks using the same proof-of-work. This provides the sidechain with mining security proportional to the Bitcoin miners who opt in.
Notable Sidechain Projects
- Liquid Network — A federated sidechain focused on fast, confidential transactions between exchanges and traders. It supports Confidential Transactions (hiding amounts) and issued assets.
- RSK (Rootstock) — A merged-mined sidechain that provides Ethereum-compatible smart contracts using bitcoin as the native currency.
Trade-offs
Sidechains involve inherent trade-offs compared to the Bitcoin main chain:
- Different security model — Federated sidechains trust the federation; drivechains introduce new miner incentive considerations
- Additional complexity — Users must understand pegging mechanics and trust assumptions
- Liquidity fragmentation — Bitcoin locked in sidechains is not available for main-chain transactions or Lightning channels
Sidechains vs. Layer 2
Sidechains are sometimes categorized as layer-2 solutions, but this is debated. Unlike the Lightning Network (which settles directly on Bitcoin's main chain), sidechains have their own consensus mechanism and blockchain. A more precise framing is that sidechains are "parallel chains" connected to Bitcoin rather than layers built on top of it.
Common Misconception
Moving bitcoin to a sidechain does not create new bitcoin. The main-chain bitcoin is locked (made unspendable on the main chain), and a corresponding amount is made available on the sidechain. When pegging out, the sidechain tokens are destroyed and the main-chain bitcoin is unlocked. The total supply across both chains remains constant.