With the growth in blockchain technology, tasks, like maintaining records and transactions, have become more reliable. Through this technology, an individual can store tamperproof data anywhere in the world. It will operate as a database that will be unchallengeable and could be referred to in case of any dispute related to authenticating transactions, verifying ownership, and other similar activities.
Blockchain technology has shown immense scope, but it still has a long way to go, in dominating the global market. There are a few limitations associated with Blockchain that require to be addressed, to gain global consideration. Issues like the quick processing of transactions and scalability must get addressed. Verification of transactions on a blockchain is a time-consuming and computationally intensive task.
Scalability and speed restrictions have restricted blockchain technology from being fully integrated into quicker mainstream operations. The Blockchain of Bitcoin is only able to process 5 transactions per second (TPS), whereas Ethereum processes 10 to 15 transactions per second. Visa, on the other hand, can process 24,000 TPS.
To address the scalability issues, the solution identified is the Second Layer Blockchain solution.
Transactions will be separated into small sets and stored on the second layer, allowing more transactions to be processed in a day.
The new solution will be developed on top of the preexisting blockchain. The functioning of the second layer will be independent of the main blockchain, processing sets of transactions independently. This will allow blockchain to compete with traditional payment systems like Visa.
Types of Second Layer Blockchain Solution
There are two types of Second layer blockchain solutions
- State Channels: example, The Bitcoin Lightning Network
- SideChains: ex, Polygon
In this blog, we will talk about SideChains
In general language, Sidechain can be defined as a blockchain in which communication with other blockchains is possible.
The sidechain can be categorized into two categories:
- Those having two separate blockchains: In simple words, if a blockchain is a Sidechain of another, both blockchains will have their native cryptocurrency and both blockchains will be equal.
- Those which are interdependent: In this, one sidechain is considered as the ‘parent’, and the other is considered as a ‘child’ or dependent chain. Here, the child chain derives its assets from the parent chain.
There are several ways through which SideChains can interact with one another; the most common being asset exchange. To execute asset exchange a 2-way peg is used. In this, if a person is having BTC and wants to have ETH; he may use BTC-ETH pair to trade BTC for ETH. But executing this, one may require the services of a crypto exchange, which will charge a fee and there is also a third-party risk.
The more effective way is to use lockboxes that are inbuilt in the 2-way peg. It is located on both blockchains of BTC and Ethereum. When a BTC is to be transferred from one Bitcoin network to a sidechain, first it is required to be added to the lockbox, along with information about the destination address. Once the transaction is stored on the BTC blockchain, the lockbox will then send the BTC to the sidechain address. To receive the payment back the whole process is executed in reverse.
2-way peg is a bridge used to transport crypto assets from one chain to another and vice versa.
Disclaimer: The article is meant for the educational purpose only and in no way it should be considered as financial advice. Own research on the topic is advisable.
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