On-chain scaling is just too hard – so what comes next?

The goal of blockchain technology is to bring freedom and true decentralization to the people. However, once you start digging deeper into the technology you will discover that everything has a cost. In blockchain, you can get decentralization and censorship-resistance, but always at a cost of scalability and speed. This phenomenon has a formal proof — known as the DCS Trilema or DCS Theorem — which states that one can achieve only two of the following three properties in a distributed system: decentralization, consensus, scale.

Second layer solutions are addressing this issue in an elegant and native way. In this extract from the original research entitled "Blockchain scaling with layer 2: theory and practice" we will examine some of the existing solutions and how they are helping to bring the power of blockchain to billions of users.

Sidechains historically were the first proposal for how we can achieve almost unlimited scaling and good privacy, preserving the security of the base layer protocol. They allow users to lock some coins up on the main chain and in return get coins on the parallel chain with its own rules, consensus and much more flexibility on how the protocol is governed. Some significant sidechains include:

Plasma

Plasma is the sidechain implementation for Ethereum which is just a mainnet smart contract that takes care of all the rules and validation/governance on the Plasma chain.

Block validation on the sidechain is either done by a single operator or by a consensus of a much smaller set of validators than that of the base layer. This alone allows for the quickening of block frequency and number of maximum possible transactions in each block. Moreover, this will avoid the issue of block propagation and latency which is always the case for base layer blockchains, where the block must be accepted by tens of thousands of nodes around the world.

The main drawback and problem with this approach is that sidechains always introduce some degree of centralization. Developers of Plasma and RSK try to preserve as much trustlessness as possible, but this is not always possible. The gateway that transfers Ether or Bitcoins is usually controlled by a single party and can be vulnerable to attacks. Even though RSK’s federation of validators or a Plasma chain operator cannot necessarily steal user funds due to the protocol rules, they still can acquire transaction data, deanonymize users or withhold some information.

Lightning Network

Built for Bitcoin and Bitcoin-like blockchains (Decred, Litecoin), Lightning Network (LN) is probably the most well-known second layer payment network. The main concept in LN is a payment channel that can be opened among any two users by including a special funding transaction in the underlying blockchain. Such a transaction is completed in a form of 2-of-2 multisig, meaning no party can single-handedly withdraw the money. To make sure that funds won’t be lost forever in the channel in the case of non-cooperation, or if the private key is lost, both sides sign each other’s transactions.

Once the channel is open and funded with some BTC, both parties can transact as fast as their peer-to-peer connection allows and pay no fees for doing so. Lightning transactions are completed in the form of cryptographic commitments. This allows for completely trustless payments: any party can close the channel and fix the outstanding trading balance on the Bitcoin blockchain at any time.

The practical use-case of LN is not that every single user will publish an onchain transaction whenever they need to make a payment; rather it will work as an actual network. If Alice does not have a direct channel opened with Bob, she can always create a multihop transaction that will use several channels to reach its destination – pretty much the way internet or GSM routing works nowadays.

Another benefit of LN is that it’s not controlled by any particular corporation or even group of developers. The development started with writing a documentation called BOLT (Basis of the Lightning Technology). These BOLTs describe every aspect of the protocol in forensic detail using pseudocode and plain English. Then there are multiple teams around the world building actual implementation using different programming languages and platforms, but since they all collaborate on the same reference specification, the resulting software is interoperable.

GEO Protocol

GEO protocol is an off-chain scaling solution that can be built on top of existing public blockchains and connect them in a single cross-chain network. There is no common ledger that requires computationally-expensive nodes and power to secure. Instead, it is an off-chain protocol that leverages a distributed network of state channels and trustlines connecting them. The advantage is that unlike Bitcoin, Ethereum or Plasma, a GEO node can be spun up on a comparably slow and cheap device – like a smartphone or Raspberry Pi computer.

GEO is leveraging the concept of trustlines which was pioneered by Ryan Fugger from Ripple. The idea is quite similar to bidirectional channels in LN or Raiden, although it is not based on the locked up multisig liquidity, but rather on a bilateral agreement between exactly two users. This agreement consists of two credit lines, as well as a balance indicating if, and how much, one party owes the other. Payments between non-trusting strangers are implemented by propagating balance updates through a network of trustlines until the payment reaches the receiver.

Trustlines mechanics

Trustlines consist of IOU (I Owe You) channels where users can issue their own currency or asset and the network facilitates free and unrestricted exchange of that asset. This also allows cross-blockchain exchange of value directly between holders without engaging with centralized exchanges.

Another concept developed by GEO protocol is composite channels, which are a combination of trustlines with user-issued assets and classic state channels with cryptocurrency locked up in an on-chain multisig wallet. This combines almost infinite scalability with a trustlessness of the base layer blockchain or multiple blockchains. At the end of the day, the user is allowed to not only make cryptocurrency transactions, but also tokenized fiat money, real world property and other assets. One tangible example of this technology would be a cross-chain DEX (decentralized exchange) enabled by the protocol from scratch.

Celer Network

Celer Network is a blockchain agnostic and horizontally scalable protocol that increases the scalability of blockchains through off-chain scaling. It utilizes a layered technology architecture, with several core technical innovations including:

• Channel construct suite with sidechain channels and flexible support for generalized off-chain dApp state transitions;
• Optimal state routing algorithm with 15x higher transaction throughput than existing state-of-the-art solutions;
• Off-chain operating system that simplifies development and usage of off-chain applications on various platforms.

It should be noted that there are other solutions that have taken a similar approach such as the Lightning Network, Raiden, Trinity and Plasma. Celer Network differentiates itself because it will be compatible with all the other projects fighting to scale on-chain.

Raiden Network

Just like Lightning Network for Bitcoin, Raiden creates a sequence of payment channels outside of the blockchain itself to resolve transactions quickly. One of the first implementations of Raiden Network is called µRaiden, which is specifically designed for micro payments. The difference is that µRaiden only uses unidirectional payment channels, whereas Lightning Network is leveraging bidirectional payment channels.

What does the future hold?

The dynamics and development of public blockchains pretty much indicates the inevitability of further expansion and growth of second layer networks. The Bitcoin Cash experiment has proven that on-chain scaling is a dead end and even if it can technically solve the scaling issue, it will always do so at the expense of decentralization which in turn will completely destroy the purpose of why blockchains were created in the first place. In addition to scaling and privacy, second layer networks will extend the capacity of blockchain technology and open new use-cases that in turn will bring Ethereum, Bitcoin and other technologies into the hands of the next billion people.

About the author: Stepan Gershuni is a managing partner at New Mining Company, a technical advisor at REMME and a member of the Expert Council on the Legislative Support of Financial Technologies Development in the Russian Federation. He is regular contributor to Forbes and other outlets on tech, cryptocurrency and blockchain.
LinkedIn https://www.linkedin.com/in/sgershuni
GitHub https://github.com/Gerstep