To Sidechain or not to Sidechain?

Whilst perhaps not one of the biggest questions currently facing Blockchain technology, the utility of sidechains has been somewhat neglected. The concept initially emerged in discussions as early as 2014 as a way to avoid the proliferation of new alt-chains. Something it obviously failed to do. Probably for the better. However, the technology still has some serious potential uses today.

As the CryptoKitty crisis on Ethereum demonstrated, scalability remains one of the major obstacles facing decentralized blockchains. The cute virtual kitten game became so popular in fact, with the infamous ‘Celestial Cyber Dimension’ Kitty pictured fetching a handsome $140,000, that CryptoKitties were accounting for well over 10% of all Ethereum transactions at one point, meanwhile pending transactions increased six-fold. The result? Congestion on the network meant that Gas fees became uneconomically expensive for many of Ethereum’s potential uses.

For the moment, Ethereum can only handle up to 15 transactions per second (tps), Bitcoin even less with 5. When compared with Visa’s 65,000 tps capacity, decentralized blockchain adoption is clearly hampered by its scalability limitations.

This is where the potential for sidechains comes in. Simply put, pegged sidechains involve a two-way peg which enable tokens to be moved from a mainchain onto a sidechain. Tokens from the mainchain are sent to an address where they are temporarily locked and reissued on the sidechain. These tokens can then be freely used on the sidechain without directly adding information, and therefore congestion, to the mainchain. These tokens can be sent back to the mainchain, upon which the original tokens are unlocked, and the reissued sidechain tokens are instantly burnt. This means the usable supply of tokens is constant across both chains.

You have a motorway with its own rules and legal sovereignty (the main blockchain), but for whatever reason this motorway and its rules are not appropriate for how you’re trying to get from A to B. Perhaps the speed limit is too slow, there is too much traffic, gas is too expensive, or maybe there isn’t even an exit for you to get off at B. So instead you go park your car (coins) in a specially designated zone (wallet) and you hand in your keys (control of your original coins). At this point the clearing agency (sidechain and mainchain) verifies what car you were driving and instantly fabricates an identical copy of your car right before your eyes. Only this new car has the regulatory compliance to drive on a new motorway with its own rules and legal sovereignty (the sidechain).

Perhaps the new speed-limit is 10x as fast, petrol costs less and you can even use your car to fly around instead of just driving. When you’re done, you simply go back to the specially designated parking zone and hand in your new keys. At this point your old car and keys are returned to you and you can travel on the original motorway again. Provided you haven’t sold your Mercedes keys on the sidechain to buy some Audi keys instead. In that case you simply receive a new car on the mainchain (a different ERC20 token for example).

If we extend the analogy to CryptoKitties, the only way to avoid getting caught in a traffic jam on the mainchain was to pump even more expensive ‘gas’ into your engine (See what I did there). It also meant that all kinds of different motorway users were getting in each other’s way. It isn’t efficient for lorries, Ferraris, bicycles, and plain old Volkswagens to share the same road. Indeed, why not just create a system of bespoke motorways parallel and connected to the mainchain, but with their own traffic rules to suit different use cases? In other words, a sidechain. There is no good reason why CryptoKitties should compete with financial institutions for the same bandwidth. This is the logic behind sidechains and how they overcome scalability problems.

But sadly, sidechains are not a panacea. One of the benefits of Ethereum is the security its decentralized proof-of-work model provides. Sidechains do not have direct access to the security of the mainchain. Instead, sidechains have their own rules and make their own trade-offs. Speed and cost might be prioritized over decentralization, thus removing the ‘trustless’ nature of decentralized blockchains.

Indeed, sidechains are often run by a small number of private nodes. If that sidechain is unsecured, then so are your newly pegged coins, and your original coins too. A dodgy cop could theoretically seize your precious car. However, this is not a problem if you can trust the node operators. Many major financial institutions are using centralized peer-to-peer verification based blockchains because they have no problem trusting the network’s other users and node operators. The point being, there is no ‘one-size-fits-all’ blockchain. Trade-offs should be made according to the wants and needs of users.

As Gluwacoins are ERC20 tokens, their ease-of-use is constrained by the costs of using Ethereum. As Gas fees are high, so are Gluwa transaction costs. For some use cases such as Gluwa’s partners Aella, who handle micro-loans in Gluwacoins, the cost of executing a transaction on Ethereum can be worth as much as the transaction itself. This is clearly prohibitively expensive and inefficient. While Ethereum and Bitcoin are both trying to solve these scalability issues with Raiden and Lightning respectively, it is unclear if or when these solutions will materialize.

As a result, Gluwa is in the initial stages of developing a bespoke, pegged private sidechain with the intention of reducing transaction costs and increasing speeds and capacity. Put simply, the sidechain can handle 1000 extremely low-cost Gluwacoin transactions on its network, condense them and then pay a single Gas fee to record all these transactions on Ethereum, rather than paying a gas fee for every single transaction.

It is important to note that this sidechain will be developed as an entirely optional functionality. Those users who wish to gain access to lower transactions fees, they can use their assets on the sidechain. Whereas the users wish to remain solely in a decentralized blockchain can do so as well. Gluwa has no intention of making its sidechain an integral part of its service, but rather, simply allow users greater freedom in how they decide to use Gluwa. Gluwa believes users can make their own decisions and set their own priorities in the future of blockchain-based finance. More details on Gluwa’s sidechain to follow…

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