Off-chain Scaling Depth Analysis

1. The Necessity of Scalability

The future vision of blockchain is to achieve decentralization, security, and scalability, but usually only two of these can be realized. This is known as the impossible triangle problem of blockchain. For many years, people have been exploring how to improve the throughput and transaction speed of blockchain while ensuring decentralization and security, which is to solve the scalability problem.

Let's first roughly define the decentralization, security, and scalability of blockchain:

• Decentralization: Anyone can become a node and participate in the blockchain system. The more nodes there are, the higher the degree of decentralization.
• Security: The higher the cost of gaining control of the blockchain system, the higher the security, and the chain can resist a larger proportion of attacks.
• Scalability: The ability of a blockchain to handle a large number of transactions.

The first major hard fork of the Bitcoin network originated from the scalability issue. As the number of users and transaction volume increased, the 1MB block size limit of the Bitcoin network began to face congestion. Starting in 2015, there were disagreements within the Bitcoin community regarding the scalability issue, with one side supporting larger blocks and the other side advocating for the use of the Segregated Witness solution to optimize the main chain structure. On August 1, 2017, the side that supported large blocks independently developed an 8MB client system, leading to the first major hard fork of Bitcoin and the birth of BCH.

The Ethereum network also chooses to sacrifice some scalability to ensure network security and decentralization. Although Ethereum does not impose a block size limit like Bitcoin, it effectively sets a cap on the gas fees for individual blocks, aiming to achieve trustless consensus and ensure widespread distribution of nodes.

From the CryptoKitties of 2017 to the DeFi summer, and then the rise of GameFi and NFTs, the market's demand for throughput has been steadily increasing. However, Ethereum can still only process 15-45 transactions per second, leading to rising transaction costs, longer settlement times, and most DApps struggling to bear operational costs. The ideal scaling solution is to maximize the transaction speed and throughput of the blockchain network without sacrificing decentralization and security.

2. Types of Expansion Plans

We can categorize the scaling solutions into two main types: on-chain scaling and off-chain scaling based on "whether to change a layer of the mainnet".

2.1 on-chain scalability

Core concept: A solution to achieve scalability by changing a layer of the mainnet protocol, with the current main solution being sharding.

There are various solutions for on-chain scalability, this article will not elaborate, briefly listing two:

• Expand block space, increase the number of transactions packaged in each block, but this will raise the requirements for node devices and reduce the level of decentralization.
• Sharding, which divides the blockchain ledger into several parts, with different nodes responsible for different accounting, allows for parallel computation to handle multiple transactions simultaneously. This can reduce the computing pressure on nodes and the barrier to entry, increasing transaction processing speed and the degree of decentralization, but it may decrease the overall security of the network.

Changing a layer of the mainnet protocol may produce unpredictable negative effects, and any slight security vulnerability in the underlying layer can seriously threaten the entire network's security.

2.2 off-chain expansion

Core concept: a scaling solution that does not change the existing Layer 1 mainnet protocol.

Off-chain scalability solutions can be further divided into Layer 2 and other solutions:

• Layer2: State Channels, Plasma, Rollups
• Others: Sidechains, Validium

3. Off-chain scaling solutions

3.1 State Channels

3.1.1 Summary

State channels stipulate that users only need to interact with the mainnet when the channel is opened, closed, or disputes are resolved, allowing interactions between users to be conducted off-chain, in order to reduce transaction time and costs, and achieve unlimited transaction frequency.

State channels are simple P2P protocols suitable for turn-based applications, such as two-player chess games. Each channel is managed by a multi-signature smart contract running on the mainnet, which controls the assets deposited in the channel, verifies state updates, and arbitrates disputes between participants.

3.1.2 Timeline

• 2015/02: Joseph Poon and Thaddeus Dryja released the draft of the Lightning Network white paper.
• 2015/11: Jeff Coleman first systematically summarized the concept of State Channel.
• 2016/01: Joseph Poon and Thaddeus Dryja officially published the Bitcoin Lightning Network white paper.
• 2017/11: The first design specification for State Channel based on the Payment Channel framework, Sprites, was proposed.
• 2018/06: Counterfactual proposed a detailed design of Generalized State Channels.
• 2018/10: Proposed the concepts of State Channel Networks and Virtual Channels.
• 2019/02: The concept of state channels was extended to N-Party Channels, and Nitro is the first protocol based on this idea.
• 2019/10: Pisa expands the concept of Watchtowers to solve the problem of participants needing to be constantly online.
• 2020/03: Hydra proposed Fast Isomorphic Channels.

3.1.3 Technical Principles

The general workflow of a state channel:

1. Participants open a channel by depositing funds into the mainnet smart contract.

2. Participants can conduct an unlimited number of transactions off-chain and communicate with each other to update the status through signed messages.

3. When closing the channel, participants submit the final state to the mainnet contract. If all signatures are obtained, execute immediately; otherwise, wait for the challenge period to end.

4. In case of disputes, you can submit a fraud proof to the mainnet contract for challenge.

3.1.4 Advantages and Disadvantages

Advantages:

• Instant confirmation, low transaction fees
• High throughput, strong scalability
• Good privacy

Disadvantages:

• Requires pre-locking of funds
• Participants must remain online.
• Not suitable for open participation applications
• The cost of establishing and closing channels is high

3.1.5 Application

Main applications: Bitcoin Lightning Network, Ethereum Lightning Network, Celer Network.

Bitcoin Lightning Network:

• Proposed in 2015, mainnet launched in March 2018
• As of November 2022, there are a total of 76,236 payment channels and 5049 BTC locked.

Ethereum Lightning Network:

• Established in 2017, launched mainnet in May 2020.
• Currently, there is a lack of development progress, and multiple exchanges have delisted the token RDN.

Celer Network:

• Established in 2018, added incentive layer
• Suitable for high-frequency interactive applications such as esports platforms

3.1.6 Application Comparison

The Lightning Network is currently the most successful state channel application with a relatively complete ecosystem. The development of the Thunder Network is relatively slow. Celer Network expands more application scenarios by adding an incentive layer.

3.2 Sidechains

3.2.1 Overview

The concept of sidechains was proposed in 2012 and the first related articles were published in 2014. Sidechains are a form of blockchain that emerged to accelerate Bitcoin transactions, allowing for more complex contracts or improved consensus mechanisms. When the transaction results of sidechains are ultimately sent back to the main chain, they are recorded on the validator's end.

3.2.2 Timeline

• 2012/01: The concept of Bitcoin sidechains was proposed in chat rooms.
• 2014/10: Publication of Bitcoin sidechain paper
• 2017/04: POA Network testnet launched
• 2017/10: Matic Network launched
• 2017/12: POA Network mainnet launched
• 2018/01: Skale testnet launched
• 2018/10:xDai Chain testnet launched
• 2020/06: Skale mainnet launched, Matic PoS Chain mainnet launched
• 2021/02: Matic Network was renamed to Polygon Network
• 2021/02: Axie Infinity game sidechain Ronin mainnet launched
• 2021/12: xDai Chain merged with Gnosis Dao to form Gnosis Chain
• 2022/03: POA Network merged into Gnosis Chain

3.2.3 Technical Principles

The main technical principles of sidechains include:

1. Bi-directional anchoring: Main chain and side chain validators record each other's current state in real time.

2. Incoherent anchoring: Sidechain validators must monitor main chain activity, but the main chain cannot confirm the sidechain status, requiring the introduction of the Certifiers mechanism.

3. Asset Cross-Chain:

   • Main Chain → Side Chain: the main chain locks assets, and the side chain generates wrapped asset
   • Sidechain → Mainchain: Sidechain burns wrapped asset, Mainchain unlocks asset

The security of assets on the sidechain depends on the security of the sidechain itself, primarily its consensus mechanism.

3.2.4 Advantages and Disadvantages

Advantages:

• Enables fast, low-cost transactions
• Supports more complex smart contracts
• Does not affect the security and decentralization of the main chain

Disadvantages:

• Requires reliance on joint signature mechanism, security is relatively low
• Cross-chain bridges may become targets of attacks
• Main chain assets need to be locked on the bridge.
• Completely rely on the honesty of validators

3.2.5 Application

Main applications: Gnosis Chain ( original xDai ), Polygon, Ronin

Gnosis Chain:

• Mainnet launched in September 2018
• Merged with Gnosis DAO in 2021
• Using PoSDAO model, staking can earn 15% APR
• The current TVL is approximately $53M, with 35 operational projects.

Polygon:

• Established in 2017, mainnet launched in June 2020
• Renamed in February 2021, transformed into a scaling solution aggregator.
• The ecosystem is developing rapidly, with over 37k DApps.
• The current TVL is approximately $1.07B

Ronin:

• Sidechain developed for the Axie Infinity game
• Mainnet launched in March 2021
• Adopts PoA consensus, with a maximum of 25 validator nodes
• In March 2022, suffered a $625 million hacker attack.

3.2.6 Application Comparison

Gnosis Chain focuses on stablecoin payments, Polygon is developing rapidly and comprehensively, and Ronin is designed specifically for gaming but its security is questionable. Polygon is leading in ecosystem development, technological innovation, and financial strength.

3.3 Plasma

3.3.1 Overview

Plasma is a framework for building scalable DApps. It emerges as an evolutionary solution for sidechains, aiming to minimize user trust in sidechain Operators. The fundamental principle of Plasma is that even if there is a security failure in the Plasma chain, user assets can still be withdrawn to the mainnet.

3.3.2 Timeline

• 2017/08: Vitalik and Joseph Poon proposed the Plasma white paper
• 2018/01: Vitalik proposed Plasma MVP
• 2018/03: Vitalik proposed Plasma Cash
• 2018/06: Dan Robinson proposed Plasma Debit
• 2018/11: BANKEX Foundation proposed Plasma Prime
• Since 2019: The Ethereum community began exploring Rollups

3.3.3 Technical Principles

The core idea of Plasma:

1. off-chain execution: Most of the work is processed outside the mainnet.
2. Status Commitment: Regularly submit Plasma chain status on the mainnet
3. Exit mechanism: Users can withdraw funds from the Plasma chain to the mainnet at any time.

User Flow:

1. Deposit assets into the Plasma chain on the mainnet contract.
2. Conduct transactions on the Plasma chain
3. The operator regularly submits status commitments to the mainnet.
4. Users can initiate a withdrawal request at any time and retrieve their assets after the challenge period.