How Could Enterprises Benefit From Sidechains?
Amidst the increased blockchain adoption we have witnessed over the past few years, bottlenecks and limitations have become apparent on both enterprise and national levels. Although reducing friction in global financial markets through the circumvention of middlemen has become an irresistible function of digital currencies, decentralised and open-source platforms such as the XRP Ledger are still hard at work tackling scalability and accessibility.
Spanning from major regulatory challenges faced by nation-states down to industry-specific hurdles, the use cases of blockchain continue to face scrutiny around issues such as decentralisation, security, and scalability. However, why has the number of enterprises and governmental bodies incorporating distributed ledger technology into their verticals never been higher?
Given the struggle between barriers to wider adoption and the irrefutable benefits of innovations such as smart contracts and blockchain technology as a whole, let’s explore how sidechains, and in particular the XRPL’s sidechains, stand out from the many solutions that could and have enticed enterprise to jump into the ecosystem.
XRPL: The Key To Business Scalability?
Using their now-established technologies, Ripple’s enterprise-grade services, which capitalise on the XRP Ledger’s functionalities, have proven to be faster, more transparent, and even more cost-effective than traditional financial solutions. The XRPL also has one of the greenest configurations, given the negligible energy required to settle transactions at a global scale. In addition to improving the bottom line for businesses, being a sustainable alternative to major blockchains ranks the XRPL as an attractive choice.
To put the transaction capabilities of the XRPL into perspective, XRP can be moved internationally within 3-5 seconds while costing less than one-thousandth of a dollar. Perhaps even more remarkable is that 1,500 such transactions can be settled within a second on the network.
Given these impressive figures, it should be no surprise that many enterprises are looking to adopt and unlock the potential of the XRPL.
Proposed Functions of The XRPL
The XRPL, along with its native digital currency XRP, provides an innovation platform for financial institutions, enterprises, governments and more. Although XRP is best known for its market-leading payments system, the XRPL’s functions extend far beyond transactions.
Cross-border payments, crypto liquidity, and the development of Central Bank Digital Currencies (or CBDCs) are among the leading applications of the XRPL to date. The XRPL is one of the first blockchains worldwide to permit the implementation of scalable, secure, and sustainable CBDC, which meets the stringent security expectations of Central Banks.
Arguments For Blockchain Adoption in Enterprises?
Enterprises like Tranglo have used the blockchain to “strengthen their cash flow position while moving funds quickly and securely at a lower cost than existing banking routes”. Further applications of the technology are demonstrated by Nium, who uses the XRPL to enable remittances to be sent at a lower cost in regions like the Philippines and Mexico.
On a national scale, the government of Palau has begun developing their own CBDC as part of its “commitment to lead in financial innovation and technologies, which will provide the citizens of Palau with greater financial access”. But how, given the massive processing power required by international banking, is the XRPL looking to overcome the scalability issue?
Sidechains: A Solution To Scale The XRPL
The XRPL’s main network (or Mainnet) needs to remain efficient to grow sustainably on an enterprise and governmental level. So, let’s discover why some experts have identified sidechains as feasible solutions when addressing the scalability limitations of the network.
Sidechains are independent blockchains, running separately from the main or public chain on which all instances of the central work history are recorded. Essentially, we can think of sidechains as an alternate universe in which development, testing, and even deployment of new and improved code can occur without congesting or compromising the Mainnet’s stability.
Currently, sidechains are one of the most interesting features being developed on the XRPL. Not least because they are the collective brainchild of a global community of developers, but also because they herald a new era for the XRPL – one in which native smart contracts and cross-chain interoperability can become reality without sacrificing the current “lean and efficient” configuration that the XRPL is known for.
That brings us to the question: Can we implement highly requested features like smart contracts and maintain the efficient payment configuration the XRPL is known for? Could we have the best of both worlds? Federated sidechains may very well hold the answer.
What Are Federated Sidechains?
Since the exponential growth we’ve experienced in the deFi space, one of the most widely requested XRPL features has been smart contract compatibility. However, some members of the community have advocated against rolling out any features that could potentially compromise the stability of the network. This is why proposing and validating significant code changes sometimes take a substantial amount of time and also why federator sidechains may be necessary to instigate enterprise involvement.
A federator (software connecting at least two instances of the XRPL) will allow anyone to run a sidechain to the XRPL. This federator acts as a bridge, or connector, between the Mainnet and consists of its own validators known as federators. These entities mirror incoming transactions from and to the Mainnet and must also adhere to a quorum of 80%.
Let’s examine why federated sidechains are important, and how they could potentially help enterprises.
Sidechain Configuration & Purpose
These branched blockchains are to be designated to specific applications or use cases, enabling the creation of multiple ‘child blockchains’. By designating a confined sidechain to specific, high-demand processes such as high-speed or complex computations, the strain on the main chain is kept under control because it only has to oversee and protect the Mainnet instead of housing and verifying all the complex tasks. These are monitored and validated by a group of federators on that sidechain. In doing so, the main chain is kept ‘lighter’ and faster while the sidechains can be pushed because their impact on the main chain stays limited.
The predominant function and purpose of implementing sidechains are therefore considered to be problem-solving. Resource segregation, governance & security, and scalability limitations could be among the key problems solved by sidechains on the XRPL.
Benefits of Sidechains for Enterprises
Data access, network efficiency, digital identity, automatic billing systems, and smart contracts for fractionalised asset ownership are among the most promising enterprise use cases for smart contracts and, therefore, sidechains. But how can these use cases benefit enterprises choosing to adopt the technology?
As we just saw, in addition to solving complex problems for enterprises, implementing federated sidechains can be thought of as providing a sandbox for developers, giving them the infrastructure for experimentation and innovation.
Since these parallel ledgers have their own rules and consensus algorithms, enterprises can design and implement protocols relating to pertinent business areas ranging from HR functions like payrolling, to finance functions like asset ownership and management. In doing so, a company can reduce their dependence on external contractors and drive costs down in the long run.
But the benefits don’t end there:
- Digital Identity management
- Enterprises can store information about the company, staff, and clients on the blockchain.
- Automatic billing systems
- International invoices, payrolling and such can be triggered by smart contracts along the supply chain with less human oversight, which is prone to error, inefficiencies and deception.
- Data access rights
- Sensitive information such as digital identities and payment data can be shared strictly with the right people
- Fractionalised asset ownership
- A real estate company could use federated sidechains and smart contracts to permit the distribution of rent payments to investors. If an investor owns 10% of that asset, they will receive 10% of that rent.
For more information about federated sidechains, click here.