Blockchain Scaling Solutions
Explanation
GM folks👋🏾,
Welcome to Deplanet Episodes.
Today’s edition will be focused on the exploration into the obstacles to the mainstream adoption that Blockchain and DLT (Distributed Ledger Technology) is currently facing. So, today’s edition is devoted to something that is often considered the drawback of blockchain – Scalability.
Blockchain technology is one of the new technologies proving itself making its space in the global economy, the underlying structure of decentralized network faces a key challenge in mass adoption known as the Blockchain Trilemma.
For those who don’t know what Blockchain trilemma is, here is a snippet of it –
The blockchain trilemma referred by a common belief that decentralized networks can only provide two out of there benefits at any given time with respect to decentralization, security and scalability. For example, any network built on decentralization and scalability will have to shove off security or if it’s security and scalability, the network will not be decentralized. With that being said, the current blockchain networks have been facing the issue of this blockchain trilemma.
Ethereum (ETH) which is one of the largest adopted platform networks offering range of functionalities for developers to build, despite that it suffers from the slow transaction speeds and high transaction costs (also called gas fees), which happens to raise to hundreds of dollars for small amount transactions, due to network congestion (traffic).
Alternative networks like Solana (SOL), Cardano (ADA) comes with other type of disadvantages like decentralization (SOL) and slow roll out times on Cardano (ADA).
In a web3 space, when we acknowledge the mass adoption which would be happening in 2022 and later year, addressing the blockchain scalability and optimizing its efficiency and cost are one of the key important aspects. Currently, approximately there are over 200 million people in crypto space worldwide, this number will soon go to billion in the future. There is now way the existing blockchains will be able to support that.
Scalability
In simple terms, scalability means to support high number of completed transactions at less time, accelerating growth. As use cases of blockchain networks expand and adoption of blockchain tech accelerates. Scalability is the only path for blockchain networks to compete with centralized applications where the transaction settlements, usability is far superior. As referred by blockchain trilemma, many blockchain platforms have established as decentralization and security networks.
So, what are the solutions that this blockchain trilemma can be solved by maximizing the scalability of these networks.
In the blockchain network of decentralization ecosystem, Layer 1 network refers to a base layer blockchain network. Layer 1 is a standard consensus layer where all transactions are settled. Layer 1 is often referred as base architecture of a blockchain. Ethereum, Bitcoin, Solana are considered as Layer 1 blockchain networks.
Layer 2 networks are basically built on top of layer 1 which operates on top of an underlying blockchain protocol to improve its scalability and efficiency. Polygon Matic, Immutable X are few examples of Layer 2 networks. Layer 2 doesn’t require any changes in layer 1. It can be just built on top of layer 1 using its existing elements like smart contracts. Layer 2 also leverages security of layer 1 by holding its state into layer 1. Ethereum (L1) can currently process around 15 transactions per second whereas Layer 2 scaling can increase number of transactions between 2k-4k per second.
Layer 1 Scaling Solutions
Consensus mechanism (Proof of work or Proof of Stake)
A consensus mechanism is kind of an algorithm where participants in the blockchain network use to reach an agreement on the state of the blockchain ledger, including the order of transactions. The popular ones are Proof of work (PoW) and Proof of Stake (PoS). There is also another type of mechanism which Solana uses, Proof of History (PoH).
Proof of work (PoW) is one consensus protocol majorly used by Bitcoin and Ethereum (currently). Although this mechanism is secure, it is slow. That’s where Proof of Stake (PoS) came into the picture where it does not need miners to validate the transactions or solve cryptographic algorithms, it operates and validates new blocks by participants staking collateral in the network. To become a validator, means you need to stake some number of tokens. This is one of the solutions that Ethereum is working on where it fundamentally increases the capacity of the network while increasing decentralization and securing the network.
Sharding
Sharding is a mechanism adapted from distributed ledgers that has become popular recently in Layer 1 scaling solutions. Sharding simple means, is breaking down a network into multiple pieces (also called Shards) in such a way that every shard can execute transactions. This is better solution that Proof of Stake (PoS) as it does not require all nodes to maintain the entire network. These network shards parallelly works allowing high number of transactions at low gas fee. Each node in the network is given shard instead of maintaining the copy of entire blockchain. These individual shards provide proofs to the main chain and interact with one another to share addresses, balances using cross-shard communication protocols. Ethereum 2.0 is exploring shards along with Tezos and bunch of others.
Enough of Layer 1 scaling shit of Layer 1, let’s look at Layer 2’s.
Layer 2 Scaling Solutions
State channels
It allows participants in the network to exchange their transactions off chain, several times while submitting only two transactions to the base layer. Channels have the potential to process thousands of transactions per second. Despite this, they come with few drawbacks as they don’t offer open participations. Participants must know before hand and lock up their funds in a multi-sig contract. This scaling solution is suitable to specific application and cannot be used to scale general purposes like smart contracts. This scaling solution is popularly used by bitcoin’s payment channel lightning network. In lightning network, the payment channels between nodes allows users to transfer funds through a series of nodes using channels. The network structurally rewards the most well-connected nodes also called hubs where these hubs play an essential role in the architecture. The architecture of lightning network makes it more centralized than on-chain bitcoin transactions.
It can process over 600k transactions and up to 1000k while bitcoin blockchain could handle up to 7 transactions per second. You see that’s a huge jump.
Plasma or Sidechains
This is a layer 2 solution originally proposed by Joeph Poon and Vitalik Buterin. This framework is used to build scalable applications on Ethereum. Plasma. It leverages the use of smart contracts to enable to create unlimited sidechains also called child chains of the parent Ethereum blockchain (L1). Offloading transactions into child chains from the mainchain allows for fast and cheap transactions. But the drawback with it is, users must wait longer who want to withdraw funds from the layer 2 as the verification confirmation must come from layer 1. In case of attacks, plasma child chain participants can rapidly and cheaply exit back to Ethereum without placing trust on the plasma child chain validator, which means it is still secured by the underlying Ethereum mainnet. OMG network, Loom network are few popular examples that used an adapted framework of the plasma.
Sidechains like Binance Smart Chain or Polygon Matic are in fact not layer 2 scaling solutions of Ethereum. These fall under separate blockchain of their own that have their own consensus mechanism and security properties. As sidechain codes are like Ethereum’s it makes easy to bridge to main chain Ethereum. But these sidechains lack in decentralization aspects as these are not as decentralized as the main chain Ethereum.
Next, we have rollups…
ZK- Rollups
Zero Knowledge (ZK)-Rollup is a smart contract that takes hundreds of transactions off the main blockchain and bundles into a single transaction. It sends validity proof back to the main chain. By this what happens is that the amount of data being sent through Ethereum’s main blockchain (L1) reduces, which enhances faster and cheaper transactions. ZK-Rollups work like smart contracts that scale the Ethereum network by processing multiple transfers off the main blockchain. The validity proof of validity (cryptographic proof) it submits to the main chain is also called SNARK (Succinct non-interactive argument of knowledge).
SNARK-
Succint here means the proofs are small and easy to verify even if the computation is complicated.
Non-interactive means that there is no need of back-and-forth communication a transacted person and a verifier. The verifier valid the transaction without any questions.
Argument is a formalism for talking about the proofs because the cryptography and non-determinism doesn’t make these proofs formal kind.
Of Knowledge refers to the fact that the transacting person actually has the evidence themselves
All ZK-SNARKS have all these properties where it helps in mitigating the information leak, easy to verify even if the computation is complicated and don’t require back and forth communication and they are proofs of knowledge.
ZK-Rollups as it uses validity proof method, no matter how large the computation is, the proof can be very quickly verified on-chain, therefore withdrawal on zk-rollup will be immediate.
ZK-Rollups create better value for traders and investors. It does exceptionally well in discrete areas like trading of cryptocurrencies or direct transfer of digital assets. It also eliminates or reduces of cancelling transactions which either is inconvenient or bring up anxiety levels to the users. ZK-Rollups helps in scaling the production and distribution of NFTs. As it plays a key role in raise the game of DeFi, there is a huge traction from developers and traders that are preferring ZK Rollups.
Optimistic Rollups
On the other side, Optimistic rollups are like parallel chains on layer 2 network. Optimistic rollups don’t do any computation by default which makes them inherently scalable solution. Instead, this solution, proposes the new state to Mainnet. In optimistic rollups, the transactions are written on the main Ethereum chain as calldata, which optimizes the network reducing the gas fee.
Optimistic Rollup uses fraud proofs, which means if someone notices a fraud transaction the rollup will execute fraud-proof and run the transaction’s computation. This feature makes the process longer than usual for transaction confirmation than a ZK-Rollup. The perk is the gas used to run the computation of the fraud proof is reimbursed. So, participants get incentives for proving fraud and penalized for conduction fraud.
Conclusion
There are bunch of solutions for scaling and each project is using different solutions to scale their network. Polygon Matic which is inherently sidechain itself is going to implement ZK-Rollup to enhance its scalability and Ethereum has layed a roadmap for Ethereum 2.0 where it transforms from Proof of Work (PoW) to Proof of Stake (PoS) along with the implementation of bunch of solutions discussed above for specific applications. India’s crypto exchange platform WazirX’s founder, Nischal Shetty have stepped into this scaling game of creating a network through Sharding, building Shardeum.
While nobody knows what the future holds on for which scaling solution will win out in the future. But according to Vitalik, optimistic rollups are likely to win for general purpose EVM computation and ZK rollups would win in simple payment protocols, exchanges and bunch of other specific use cases. He strongly believes ZK-Rollups will win out in all use cases as ZK-SNARK technology improves in the future.
👋🏾 That's all Folks
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