Can Sidechains And Payment Channels Solve Blockchain Scalability Issues?

The world of blockchain technology is vast and filled with interesting ideas and concepts. To scale the blockchain and make it suited for mass adoption, unusual solutions such as sidechains and payment channels will become of great importance. Although they are considered “niche” solutions today, the technology becomes more robust every week as developers continue to push the boundaries of innovation.

The scalability of blockchain technology has been a significant topic of debate for many years now. Despite a solid initial infrastructure, this technology needs to be able to grow and accommodate user demand. That is much easier said than done, as it is not a matter of upgrading the hardware or adding an extra server or two. Instead, it will often require an overhaul of the entire protocol, which can be done through a hard fork.

For the majority of public blockchains, scalability remains a pressing issue. Even networks like Bitcoin struggle in this regard, with no immediate resolution in sight. That doesn’t prevent developers from exploring new opportunities to take these ecosystems to the mainstream in the coming years.

Blockchain Scalability Problems Remain

Considering how Bitcoin is over eleven years old today, one would expect there to be some solution to today’s network’s scalability issues. Sadly, that is not the case, although several software-based solutions are available on the network. At its core, Bitcoin can only support a maximum of 7 transactions per second. That may seem like a lot, but in reality, it is a significant bottleneck preventing the leading cryptocurrency from gaining broader adoption by consumers and merchants.

Understanding the scaling issue requires a bit of education. Bitcoin’s network requires nodes capable of relaying information to the network. While running a node is cheap and relatively efficient to do so, the nodes need to remain up-to-date at all times. That poses a restriction on the overall node capacity, limiting the network as a whole. Additionally, the network can only process so many on-chain transactions at a time to keep the blockchain’s size small. If the storage requirements for a copy of the blockchain become too steep, nodes can’t keep up. Introducing larger blocks to hold more data would make them slower to relay across the network.

It’s Not An Easy Fix

With all of these bottlenecks in place, it quickly becomes apparent something will need to change. Enforcing such a change will need to occur on the protocol level, yet the solution needs to take all of the aspects above in mind. There is no simple solution to process more transactions while keeping the block size down and ensuring nodes can keep up.  Making the blocks larger is not a solution, even though it would guarantee a higher throughput and potentially cheaper transactions. However, there is no guarantee the network needs that extra capacity at all times, creating a different logistical problem.

These scaling issues are not native to just Bitcoin, however. Vitalik Buterin, the creator of the term “Scalability Trilemma“, acknowledges this issue exists in all public blockchains. Furthermore, the trade-off between scalability, decentralization, and security is a risk factor, as one cannot prioritize one over the other. Maintaining the balance is a callous, challenging act. It is the main reason why any scalability improvement will likely have to occur off-chain rather than on-chain.

Which Off-Chain Solutions Are There?

In the current blockchain landscape, an off-chain scaling solution can come in multiple forms. The main purpose is to increase the room for network transactions without creating a bigger blockchain. Any protocol tapping into the main chain to offload the burden can prove beneficial. Two of the most notable options are sidechains and payment channels. Both have their advantages and drawbacks, yet one cannot deny their potential.

The Sidechain Approach

At its core, a sidechain is a blockchain that is separate from the main network yet still remains connected to it. This interoperability usually involves a “blockchain peg”, allowing both chains to accommodate asset transfers and data flows. To ensure funds can be ported between both chains, developers can opt for using special “addresses” to issue a matching amount of a deposit on the sidechain. Another option is going through a custodian, although that introduces a level of centralization. 

Using a two-way peg can transfer assets from the main chain to the sidechain and the other way around. A sidechain can have different features, mechanisms, and technical restrictions. For example, Bitcoin’s network has a block size limit, but its sidechain can negate this limit entirely. Doing so can unlock new use cases and benefits, as it can help address some of the scalability issues found within this ecosystem today. 

The conversion of funds to and from one chain to the other is an essential aspect. Using a sidechain can unlock a new world of services, products, and solutions for users to experiment with. The Rootstock sidechain gives access to decentralized finance and smart contracts in Bitcoin’s case, features the regular blockchain is incompatible with by default. 

Why Are They Useful?

One can identify several reasons to promote the use of sidechains. Although sending value can occur on any blockchain by default, it is not always affordable. Both Bitcoin and Ethereum note very high transaction fees at times, making them less appealing for moving value to another address. With their peg to either of these two networks, sidechains can help do so more efficiently, cheaper, and potentially faster. 

Moreover, a sidechain is often capable of things the main network cannot achieve. A blockchain is often built with trade-offs in mind, such as sacrificing throughput for security and decentralization. For example, Bitcoin’s blockchain is notoriously slow to send and confirm transactions due to a ten-minute block time. Network congestion increases fees to the double-digit range, creating a rather unwieldy tool during certain times.

Developers and cryptography enthusiasts often wonder if Bitcoin’s high security standard is necessary for everyday payments. Anyone looking to pay for a coffee doesn’t necessarily need the same security as someone moving $100 million in BTC. As bitcoin’s network rules apply to all transactions, it remains ill-suited as a daily payment method for small transactions. Developers can resolve this through a sidechain, as those can leverage any consensus algorithm to provide faster transactions. Additionally, the sidechain can have bigger blocks, among other improvements.

But There’s More!

Another factor to consider is how sidechains can have code issues or flaws that will not affect the main chain. Thus, they are excellent sandboxes for developers to experiment with various ideas and features that the community wouldn’t necessarily implement on the main chain right away. That doesn’t mean all users will be happy with trade-offs, though, but sidechains allow for much broader experimentation without significant consequences. 

Users who run a main chain node will be happy to know they don’t need to store all the sidechain transactions either. As such, there is no extra “bloat” to contend with. It is an interesting approach to introducing scaling solutions, although its viability remains unclear at this time. Sidechains are still relatively new and niche solutions.

Are Payment Channels Better Than Sidechains?

The concept of payment channels is slightly different from sidechains, although they share a common goal. Payment channels introduce scalability solutions by pushing transactions off of the main chain. However, there is no separate blockchain to speak of. Instead, payment channels run on smart contracts to let users complete transactions without pushing information to the blockchain. Instead, two participants engage in a software-enforced agreement.

How Do Payment Channels Work?

In Bitcoin’s case, payment channels are accessible via the Lightning Network. Two parties need to deposit funds to a jointly-owned multisignature address, which requires two signatures to spend funds. Without consent from both parties, it is impossible to complete transactions. 

Updating user balances through this payment channel between these two parties does not require a main blockchain transaction every time something changes. However, if they want to send their respective balances to an address they own individually, there needs to be a double signature to approve and broadcast the transfers. When that happens, the main blockchain will only see two on-chain operations: the original deposits by both users and the sending of funds out of the payment channel. All other transactions related to the payment channel occur off-chain, allowing for free and near-instant completion. A very different solution from sidechains, to say the least.

In an ideal situation, both parties in a transaction will cooperate to create a smooth operation. For strangers, however, that level of trust may prove difficult to establish. Therefore, any attempt to trick the system or influence payment channels can be punished through extra mechanics, assuming the developers consider implementing those.

What About Payment Routing? 

One aspect of payment channels no one can ignore is payment routing. While these channels work when two individuals want to process a high transaction volume, they may not automatically appeal for “group transactions”. For this reason, the developers have implemented solutions that let users pay anyone they are not directly connected to, assuming there is at least one open channel through a mutually connected party.  Additionally, there needs to be sufficient payment capacity in that channel to facilitate the funds’ transfer.

Evolving the payment channels concept to allow for much broader transaction coverage will prove essential. Having everyone connect to multiple peers will increase the chances of founding new pathways to route transactions. Furthermore, users need to be given a choice in payment routing to achieve maximum efficiency at all times. Whether this is preferable to sidechains remains a topic of debate.

Closing Thoughts

Both sidechains and payment channels have tremendous potential to introduce scalability solutions for any public blockchain on the market today or in the future. Both approaches can enable transactions without creating main blockchain bloat, although their implementations differ greatly. Moreover, both concepts are still in the early stage of research and development, yet more and more users are willing to experiment with these available options. Circumventing the flaws and weaknesses of base layer transactions will become more essential when transaction fees rise on the main network. 

While exploring these new scaling options, developers need to maintain a strong degree of decentralization. Unfortunately, adding new bits and pieces to existing blockchains can make that task very difficult. One way of doing so is by introducing strict limits on the blockchain’s growth to ensure new nodes can comfortably join the ranks at any given time. Off-chain scalability solutions can help facilitate that goal, as one would only use the main chain to settle high-value transfers or pegging transactions to and from sidechains or for opening and closing payment channels. 

There is a lot of future research to do on these matters, yet they all hold merit. Scaling solutions will need to be addressed in one way or another. Whether that is through sidechains, payment channels, or a very different solution, is less important. As long as users can transact freely in an affordable and approachable manner, public blockchains will continue to be successful. 

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