Sidechains are independent blockchains running parallel to the main blockchain to which it is pegged. It refers to a side blockchain that is interoperable but non-dependent on its main blockchain.
Sidechains are usually improved blockchains, often with more functionality and transaction confirmation speeds. This facilitates the creation of multiple blockchains, each with independent consensus mechanisms, functionalities, and use cases that are all interoperable with one another, given they are created off the same main chain.
How does a sidechain work?
Practically, a side chain’s interoperability with its main blockchain is not directly a two-way communication between both chains. Instead, coins or tokens are exchanged between each chain via a unique address. For instance, to transfer Bitcoins to a Bitcoin sidechain, the token is first sent to an output address. Once the transaction is confirmed and distributed across the main chain network, an equivalent of the Bitcoin is issued on the side chain and broadcast across its network. This way, both chains can operate with one another and at the same time remain independent.
Sidechains were created as one of many solutions to the well-known Bitcoin scalability issue. Although Bitcoin is great in many aspects, such as security and transparency, transactions on its network take an average of 10mins. While this may not be an issue for large transactions, it is highly unacceptable for day-to-day consumer transactions if Bitcoin is ever to be widely accepted as a means of payment. Surely, no one is trying to wait around for 10mins just because they purchased a burger from a local restaurant).
Sidechains exist as improvements to the Bitcoin blockchain scalability issue, offering faster and better transactions. The Liquid Network is a typical example of a sidechain of the Bitcoin blockchain, offering faster and more private crypto transactions.