What is Peg-in/Peg-out?

"Peg-in" and "peg-out" refer to processes associated with sidechains or secondary blockchain networks that are interoperable with the main Bitcoin blockchain.

Peg-in is the process of moving assets from the main Bitcoin blockchain to a sidechain. This involves locking a certain amount of Bitcoin on the mainchain, which serves as collateral, and in return, an equivalent amount of a representative token on the sidechain is issued. This token is pegged to the value of Bitcoin and can be used within the sidechain's ecosystem for various purposes, such as smart contracts or specific applications.

Peg-out, on the other hand, is the reverse process where assets are moved from the sidechain back to the main Bitcoin blockchain. Users initiate a peg-out by redeeming the representative token on the sidechain, which triggers the release of the locked Bitcoin collateral on the mainchain. This process ensures that the total amount of representative tokens in circulation on the sidechain is backed by an equivalent reserve of Bitcoin on the mainchain.

These peg-in and peg-out mechanisms are fundamental to the concept of sidechains, which are additional blockchains that operate in conjunction with the main blockchain, allowing for experimentation with new features, scalability solutions, and specialized use cases without directly impacting the security or consensus rules of the main Bitcoin network.

One notable implementation of peg-in and peg-out mechanisms is the Liquid Network, a sidechain developed by Blockstream. In the Liquid Network, users can peg-in Bitcoin to obtain Liquid Bitcoin (L-BTC) on the sidechain, and conversely, peg-out L-BTC to redeem Bitcoin on the mainchain. This enables faster and more confidential transactions on the Liquid sidechain while ensuring the security and integrity of the assets through the pegged relationship.

Overall, peg-in and peg-out processes facilitate the seamless movement of assets between the main blockchain and sidechains, providing a mechanism for users to experiment with innovative features while maintaining a connection to the broader Bitcoin ecosystem.