Sidechain

A sidechain is a separate blockchain whose native asset is pegged to bitcoin, allowing coins to move from the main chain, circulate under different rules, and return. The concept was formalized in a 2014 paper by Blockstream researchers, and the most prominent implementation, the Liquid Network launched in 2018, runs one-minute blocks with confidential transaction amounts.

Why it matters

Sidechains let bitcoin experiment without changing bitcoin. Features considered too risky or contentious for the base layer, such as faster blocks, confidential amounts, or asset issuance, can operate on a sidechain while the main chain's conservatism is preserved. The unavoidable cost is trust: bitcoin's consensus cannot verify events on another chain, so the peg must be guarded by someone, and the sidechain's security is only as strong as that arrangement.

How it works

A user sends bitcoin to a peg address on the main chain, and an equivalent amount is issued on the sidechain; redeeming reverses the process. In Liquid the peg is federated, controlled by a multisignature quorum of member institutions called functionaries, who collectively custody the locked coins and sign blocks. This differs from the Lightning Network, where users retain unilateral on-chain exit rights without trusting any federation. Proposals for trust-minimized pegs enforced by bitcoin consensus itself have circulated for years, but none has achieved the agreement needed for activation.