This article highlights major Layer 2 Solutions for Scalability. It is a bit long and feel free to use Table of Contents to jump to specific sections. If you think the article is helpful, please Follow Me and Clap 50 Times [yes, you can clap multiple times].
Table of Contents:
- Why Do We Need Layer 2 Solution?
- Bitcoin — Lightning Network
- ETH Scaling Solutions — Casper vs. Plasma vs. Sharding
- Layer 2 Solution Review
- Layer 2 Token Economics
1. WHY DO WE NEED LAYER 2 SOLUTION?
Blockchain technology is great and fairly complex in terms of configuration, programming and operation. Why do we need Layer 2 solution? It mainly goes to the KPI of Transaction per Second (TPS) of blockchain compared to the traditional centralized solution. As shown in the picture below [an outdated chart but good to make a point], the Visa TPS requirement is about 47K per second. If you looking at the 11/11 TaoBao Festival, the TPS can reach over 100K per second. Therefore, before blockchain can challenge traditional centralized solution, the TPS needs to be improved significantly. This is referred as the “Salability Problem”.
In blockchain technology, there is an Impossible Triangle, which refers to Security, Scalability and Decentralization. You can only achieve two of three but not all of them. Ripple (XRP) is considered as a centralized solution in order to achieve desirable security and TPS.
There have been a few protocol projects out there tackling the scalability issue and the following picture showcases some contenders in the Layer 2 Solution landscape.
2. BITCOIN — LIGHTNING NETWORK
As observed on the blockchain network, the current average transaction value is about $50 dollars per transaction with a transaction fee of $20 per transaction. That implies a transaction cost of 40%. Also, it will take about an hour (i.e., 6 blocks to confirm the transaction) Therefore, bitcoin core developers developed a Lightning network to boost the TPS of Blockchain.
The Lightning Network is a “Layer 2” payment protocol that operates on top of a blockchain-based cryptocurrency (like Bitcoin). It enables fast transactions between participating nodes and has been touted as a solution to the Bitcoin scalability problem.
3. ETH SCALING SOLUTIONS — CASPER VS. PLASMA VS. SHARDING
Similarly to Ethereum, there have been different proposals to solve the scalability issues, mainly including
- Casper — Casper refers to Ethereum’s long-planned consensus algorithm proof-of-stake. It thus promises to be more energy efficient and egalitarian than its current proof-of-work system.
- Plasma — Plasma is another Ethereum scaling solution which involves a second layer of smart contracts over the main blockchain. Similar to sharding this method will mean that the entire network does not have to validate and broadcast every contract transaction. In theory Plasma would replace server farms with a peer-to-peer network upon which users collectively run DApps in a scalable and decentralized way.
- Sharding — Sharding will basically divide data across multiple servers instead of just the one [similar to parallel computing]. Essentially the ledger will be fragmented in this scaling out process, Buterin elaborated on Reddit;
“This is a proof of concept of (part of) a fork choice rule-based mechanism for how sharding can be bolted on top of the current Ethereum main chain, with a specialized random beacon and shard block times of <10 seconds.”
4. LAYER 2 SOLUTION REVIEW
BTC and ETH community are large enough to develop their own scalability solutions. What about other blockchain platforms? Who will solve their scalability issues? There come the following Layer 2 Solutions.
Layer 2 Solutions do not aim to solve the problem but several types of scalability issues: some to scale payment, some are used for scaling smart contract, and some to do computation off-chain. The common idea is to move most of the work off-chain and use permissionless blockchain as anchors to ensure security.
This section overviews major Layer 2 Solutions as follows.
4.1 STATE CHANNEL
4.1.1 Celer Network
Celer Network is the first off-chain operating network with coherent technology and economic architecture to bring Internet-level scalability to blockchains. Celer Network is horizontally scalable to billions of off-chain transactions per second, trust-free, decentralized and private. It encompasses a layered architecture with significant technical innovations for each layer:
- a channel construct suite with flexible support for generalized off-chain dApp state transitions beyond simple payments, sidechain-like channels with minimal fund lock up, and more;
- first-ever provably optimal state routing algorithm with 15X higher transaction throughput than state-of-the-art solutions;
- an off-chain operating system that drastically simplifies the development and usage of off-chain applications on various platforms.
In addition, Celer Network proposes a principled off-chain crypto economics design to balance tradeoffs made to achieve scalability.
Ethereum does not scale and it is very difficult for developers to apply Layer 2 Technologies like state channels on Ethereum. Therefore, we need better dev-tooling on ETH and Counterfactul is an open-source project to tackle this problem heads on. The goal is to make it easy for developers to build their applications using state channels on ETH. Here is the project on the website, and the code on the github.
The framework is designed only to support turn-based games whose moves don’t depend on time or data that is external to the channel. Though this seems restrictive, many state channel use-cases fall into this class: two-player strategy games (e.g. chess, Gomuku, rock-paper-scissors), provably fair games of chance (e.g. dice, roulette), payment channels, and many others, can all be built on top of the framework.
Virtual Payment Hubs over Cryptographic Currencies (http://eprint.iacr.org/2017/635 309). This introduces the concept of channel virtualization as an alternative for routing payments via intermediaries using the hash-locked based transactions. The main advantage of channel virtualization is that once the virtual channel is established, payments can be carried out without interaction with the intermediary. This reduces fees and latency, while at the same time improving availability.
Pisa focuses on generic state channels which can be used to build any application (i.e. payments, auctions, boardroom voting, gaming). The core contribution is a new protocol for hiring a new third party agent called the custodian. This custodian is designed to help alleviate a new assumption in state channels which require every participating party to remain online (synchronized with the blockchain). [Leaning tower to the rescue]
4.2 SIDE CHAIN
4.2.1 Loom Network
You probably did not hear Loom Network but you might hear about Cryptozombies, which teaches you to develop games using ETH platform. What is Loom Network? It is Loom Network is building a fundamental infrastructure platform to help Ethereum scale.
It allows developers to run large-scale applications, and is the first Ethereum scaling solution to be live in production.
In short, you can think of Loom Network as EOS on top of Ethereum.
4.2.2 MATIC Network
Matic Network strives to solve the scalability and usability issues while not compromising on decentralization and leveraging the existing developer community and ecosystem. Matic Network is an off/side chain scaling solution for existing platforms to provide scalability and superior user experience to Dapps/user functionalities.
4.3 OFF-CHAIN COMPUTATION
It is a decentralized applications (dApps) development framework to manage DApp logic and dependencies including Truffle, TestRPC (Ganache), Web3, IPFS on ETH.
Truebit is a technology to help Ethereum conduct heavy or complex computation off-chain. This makes it different from state channels and Plasma, which are more useful for increasing the total transaction throughput of the Ethereum blockchain. Truebit won’t let us do more transactions, but it will let Ethereum based applications do more complex things in a way that can still be verified by the main-chain.
AlphaWallet is founded by a group of blockchain enthusiasts, experts in the field and business professions who believe the technology will affect billions of people worldwide and are willing to contribute to the Ethereum community. AlphaWallet (STORMBIRD PTE. LTD.) joined EEA to help to improve the technology and support the adoption of Ethereum in the enterprise.
5. LAYER 2 TOKEN ECONOMICS
Since Layer 2 solutions will not use the token for any utility purpose, the economic incentives for core protocol innovation and second-layer infrastructure are too low as observed by Fred Ehrsam, Elad Gil, Vitalik Buterin and many others. Therefore, the token model of funding a project in these domains has unfortunately become overused.
Existing off-chain solutions often get some criticisms on their crypto economics constructs. The reason for such criticisms is mainly because the tokens issued by such projects carry nothing but the medium-of-payment functionality for future possible services. The main theme of such criticisms often goes like “This token model is simply gift cards with no stable value!”, “Why do you need a payment token if we can pay with X(insert your favorite cryptocurrency here)?”, “You are just issuing a token for the sake of having a token!”. The list goes on and the opinions get harsher.
Celer Network takes on the stab on building an off-chain token economics. They created a concept of cEconomy to ensure abundant and stable liquidity + secure and flexible availability. To “balance out” the above tradeoffs, we design cEconomy with three tightly interconnected components as follows. This probably by far the most in-depth design of token economics around Layer 2 Solutions. More information can be found here.
- Proof of Liquidity Commitment (PoLC) — To maintain a prosper off-chain operating network, we need to continuously “lock in” abundant and stable liquidity in Celer Network. PoLC is the first half to incentivize this. It works like a staking protocol. To participate, one can commit (lock) their idle liquidity (think ETH for simplicity) to a “dumb box”, called Collateral Commitment Contract (CCC), for a certain period of time.
- Liquidity Backing Auction (LiBA) — LiBA is the second half of the liquidity puzzle. LiBA enables state channel service providers to solicit liquidity through “crowd lending”. In essence, a state channel service provider starts a LiBA on Celer Network to “borrow’’ certain amount of liquidity for a certain amount of time.
- State Guardian Network (SGN) — State Guardian Network is a special compact sidechain to “guard the states” when users are offline. CELR token holders can stake their CELR into SGN and become state guardians. A user can submit her state to SGN at any time with a certain fee to ask guardians to guard the state for a certain period of time in case she goes offline. A number of guardians are randomly selected to be responsible for this state based on state hash and the “responsibility score”.
All of the information about projects are sourced from online materials and do not necessarily reflect the current state of the projects. The information here does not constitute any advice on investment or consequence of any investment.