The Last Battle: Layer 2 Vs Sidechains
Is One Better Than the Other?
In our last Battle Of The Protocols installment, I’ll be covering Layer 2 vs. Sidechains. I know that I’ve beaten you all over the head with the whole Layer 2 and Rollups discussion in these past few articles. However, I think this is an important topic to discuss, as we have yet to discuss sidechains. My goal is always to assist the EllioTrades community in becoming the most knowledgeable investors in the crypto space. My method of achieving this is by giving you all a simple yet detailed, explanation of the inner workings of crypto.
A few days ago, I shared my thoughts on the importance of foresight within the crypto industry.
The more you familiarize yourself with the technology powering this industry, the easier it will be to make educated postulations on the future and discern the winners from the losers. So in the spirit of crypto mastery, let’s jump into today’s lesson.
A sidechain is an independent blockchain linked to another main layer blockchain. You can think of it as a bit of a hybrid chain.
Sidechains have their own set of rules, rely on their own security, and use their own methods of reaching consensus (processing transactions).
The two blockchains must communicate to transfer transactions and assets back and forth. This is done through a smart contract which creates a two-way peg. The assets are then bridged over to the other chain. Of course, most of this process occurs in the background without the user’s knowledge.
Here is a diagram of what this process looks like:
Sidechains reach consensus through their own methods of PoS, PoA, PoW, or dPoS.
One of the most popular sidechains is Polygon (Matic).
A Layer 2 solution is a protocol built on top of a Layer 1 solution to provide scalability and increase TPS.
Layer 2s can scale Layer 1s by handling transactions off-chain. The great thing about Layer 2s is that even though transactions are processed off-chain, the protocol still leverages the security of the Layer 1 mainnet.
Layer 2 solutions are mostly made up of ZK-Rollups and Optimistic Rollups. For those unfamiliar with what rollups are, you can learn more about them in this article.
A large group of people believes that Layer 2 solutions are the best way forward for blockchain scaling.
Sidechains and Layer 2s are similar in the fact that they are both scaling solutions that make ETH gas fees much cheaper and increase TPS.
The main difference between Layer 2 and Sidechain solutions is that Layer 2 solutions rely on the security of the Layer 1 network. Sidechains, on the other hand, rely on their own security model.
This can be seen as a negative for Sidechains because validators possess the power to control the production of transaction blocks. This can leave the protocol vulnerable to possible fraud or manipulation from the validators.
Ansem provides us with some excellent alpha on the difference between ZK solutions and Sidechains.
However, Layer 2 and Sidechain projects may not be the rivals that many think they are:
One of the most popular Sidechains, Polygon, recently announced that they are allocating $1B to ZK-based solutions.
We’ve seen this lead to several acquisitions. So, while Polygon currently relies on its sidechain implementation, in the future, Polygon will likely be one of the leading Rollup (aka L2) protocols.
There you have it, folks. This concludes our Battle Of The Protocols series… for now. I believe that the most important takeaway from this entire series is that when it comes to the building blocks of crypto, there isn’t an “either-or”.
I’m looking forward to seeing how Layer 2 and Sidechain solutions will develop in the next five years. At the rate that the crypto space moves, I’m sure that by then, this conversation will be as ancient as the creation of the internet.
Great informative write up! Helped me understand something I was just researching up on myself lately. I love these newsletters and hope you continue doing them! Btwn work and 2 kids I’m so busy a lot of times it’s hard to keep up in a space that moves so quick and these are perfect way to stay updated and make sure I don’t miss something. One of the best things to happen to me over the last year was finding EllioTrades YouTube channel and very grateful for everything the whole team does over there!! Thank you 🙏
Thank you Daton!