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Sidechain Meaning

May 21, 2023 | Updated Jul 19, 2023
A sidechain is a discrete blockchain that is connected to the main blockchain or mainnet through a 2-way bridge. Sidechains were created to solve transaction speed issues in blockchains by decongesting the mainnet.

What is a Sidechain in Crypto?

A sidechain is a separate and distinct chain running independently from the parent blockchain, though it is linked to the mainnet via a two-way peg and smart contracts. The term “peg” refers to how a crypto’s value is connected to external assets like fiat currencies or tradable commodities. To peg a side chain to the main chain means to establish a connection or link between the two chains to enable the transfer of assets or information between them.

The peg comprises ‘lockboxes’ (some sort of output addresses) on both chains that help in transferring assets across them. That is, the digital asset is sent to the lockbox address of the main network and temporarily removed from circulation. Information about the receiving sidechain address is also included in this transaction. Once the transaction is completed and added to the blockchain, the sidechain lockbox releases the asset and sends it to the designated sidechain address. 

Sidechains vary based on the functions they are designed for. One may be built for scalability and the other for running smart contracts. An example of a sidechain is the Polygon Network, which is built on top of the Ethereum ecosystem and designed to solve scalability issues and improve user experience without compromising security.

What do Blockchain Sidechains Do?

Scalability is one of the predominant benefits of sidechains. Sidechains decongest the parent chain, enabling cheaper and faster transactions, therefore allowing more data processing capabilities without risking failure or network downtime. 

Sidechains were designed to facilitate the transfer of digital assets across multiple blockchains, enabling interoperability. Additionally, by providing a system for new concepts to be developed, tested, and deployed without waiting for broad consensus (which may be slow), sidechains can be instrumental in creating advanced functionalities for the parent chain. 

In the case of Ethereum, a separate chain becomes a sidechain when it can facilitate the asset movement to and from the Ethereum mainnet. This interoperability is attained via a blockchain bridge that utilizes smart contracts established on a sidechain and Ethereum mainnet to manage the bridging of assets between them. 

Cryptocurrency

A cryptocurrency is a virtual or digital currency that doesn’t depend on centralized authority, such as a government or central bank, to process transactions and issue new currency units.

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Stablecoin

Stablecoins are a type of cryptocurrency that is pegged or tied to another asset, such as fiat currencies or gold.

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Paper Trading

Paper trading is the practice of simulating trades in cryptocurrencies or other financial instruments, like stocks, without investing real money. Paper trading helps users practice trading strategies before investing with actual funds.

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