Off-chain Scalability Depth Analysis

1. The Necessity of Scaling

The future vision of blockchain is decentralization, security, and scalability, but usually only two of these can be achieved at the same time, which is known as the blockchain trilemma. For many years, people have been exploring how to increase the throughput and transaction speed of blockchain while ensuring decentralization and security, that is, solving the scalability issue, which is one of the hot topics in the current development of blockchain.

The decentralization, security, and scalability of blockchain are simply defined as follows:

• Decentralization: Anyone can become a node and participate in the blockchain system. The more nodes there are, the higher the degree of decentralization, ensuring that the network is not controlled by a few large centralized participants.

• Security: The higher the cost required to gain control of the blockchain system, the greater the security, which can resist attacks from a larger proportion of participants.

• Scalability: The ability of blockchain to handle a large number of transactions.

The first major hard fork of the Bitcoin network stemmed from scaling issues. As the number of users and transaction volume increased, the 1MB block limit of the Bitcoin network began to face congestion; since 2015, there have been disagreements within the Bitcoin community regarding scaling issues, with one side supporting larger blocks and the other side advocating for the use of Segregated Witness to optimize the main chain structure. On August 1, 2017, the side supporting larger blocks independently developed an 8MB client system, leading to the first major hard fork of Bitcoin and the creation of a new cryptocurrency, BCH.

The Ethereum network also chooses to sacrifice some scalability to ensure security and decentralization, by setting a cap on block gas fees to limit transaction volume. Since the emergence of CryptoKitties in 2017 and the later rise of applications like DeFi, GameFi, and NFTs, the market's demand for throughput has been continuously increasing. However, Ethereum can only process 15-45 transactions per second, leading to increased transaction costs and longer settlement times, making it difficult for most DApps to bear operational costs. The entire network has become slow and expensive, urgently needing a solution to the scaling issue. The ideal scaling solution is to maximize transaction speed and throughput without sacrificing decentralization and security.

2. Types of Scalability Solutions

According to the standard of "whether to change the layer mainnet", the scaling solutions can be divided into two main categories: on-chain scaling and off-chain scaling.

2.1 on-chain scaling

Core concept: a solution to achieve scalability by changing a layer of the main network protocol, currently the main solution is sharding.

There are various solutions for on-chain scalability, here are briefly two of them:

• Plan One: Expand block space, increase the number of transactions packed in each block, but this will raise node device requirements and reduce the degree of decentralization.

• Option 2: Sharding, which divides the blockchain ledger into several parts, with different nodes responsible for different accounting, allowing parallel computation to handle multiple transactions simultaneously; it can reduce the computational pressure on nodes and lower the entry barrier, improving transaction processing speed and the level of decentralization; however, the overall network's computing power is dispersed, which can decrease the security of the entire network.

Changing a layer of the mainnet protocol may produce unforeseen negative impacts; subtle security vulnerabilities at the underlying level can severely threaten the overall network security, potentially leading to forks or interruptions in repair upgrades.

2.2 off-chain scaling

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

The off-chain scaling solutions can be divided into Layer 2 and other solutions:

Layer2 solutions include:

• State Channel
• Sidechain
• Plasma
• Rollups ( optimistic rollups and zero-knowledge rollups )

Other options include:

• Validator
• 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 opening, closing, or resolving disputes in the channel, allowing user interactions to be conducted off-chain to reduce transaction time and costs, enabling unlimited transaction frequency.

State channels are simple P2P protocols suitable for "turn-based applications," such as two-player board games. Each channel is managed by a multi-signature smart contract on the mainnet, which controls deposited assets, verifies state updates, and arbitrates disputes. Participants deposit and lock funds after deploying the contract, and the channel officially opens after both parties sign and confirm. The channel allows unlimited off-chain free transactions ( as long as the total transfer amount does not exceed the deposited tokens ). Participants take turns sending state updates and waiting for the other party's signature confirmation. Under normal circumstances, state updates are not uploaded to the mainnet, and confirmation from the mainnet is only relied upon in the event of a dispute or when closing the channel. When closing the channel, any participant can request on the mainnet, and if unanimous signatures are obtained, it is executed immediately; otherwise, they must wait for the "challenge period" to end before receiving the remaining funds.

State channels can significantly reduce the mainnet computation load, increase transaction speed, and lower transaction costs.

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: Generalised State Channel Networks 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 expanded the concept of Watchtowers to address the issue of participants needing to stay online continuously.
• 2020/03: Hydra proposed Fast Isomorphic Channels

3.1.3 Technical Principles

Traditional on-chain workflow: users interact with the mainnet smart contracts, changing the contract state by sending transactions. The downside is that it brings time and cost issues.

State Channel Workflow:

1. Users deposit funds into the mainnet contract address, locking the funds until the channel is closed.
2. Users can conduct unlimited transactions off-chain through encrypted signed message communication.
3. If you need to close the channel, the user submits the final state to the contract.
4. If the other party signs and approves, the contract will distribute funds according to the final status; otherwise, it will need to wait for the challenge period to end.

In a pessimistic scenario:

• If a user does not respond to a status update, the other party may submit the last valid status to the contract to initiate a challenge.
• The contract allows the challenged party to respond within a certain period of time.
• If there is no response, the contract will automatically close the channel and return the funds.

3.1.4 Advantages and Disadvantages

Advantages:

• Instant transaction confirmation
• High Throughput
• Low transaction fees
• Good privacy

Disadvantages:

• Funds must be locked in advance.
• Channel capacity is limited.
• Participants need to continuously monitor online.
• The cost of creating and closing channels is high.
• Limited universality

3.1.5 Application

Bitcoin Lightning Network:

Overview: The Lightning Network is a micropayment channel in the Bitcoin network, with technological evolution including: unidirectional payment channels, bidirectional payment channels, and multi-party payment networks. It forms a transaction network through off-chain payment channels and intermediaries, solving the scalability problem of the Bitcoin network. The usage process is "Deposit ( to establish channel ) → Lightning Network transaction ( updates channel status ) → Refund/Settlement ( ends channel )". Theoretically, it can process millions of transactions per second.

Timeline:

• February 2015: Draft of the white paper released
• January 2016: Official white paper released, Lightning Labs established
• March 2018: Released the first mainnet version LND 0.4
• June 2021: El Salvador adopted Bitcoin as legal tender and launched the Chivo wallet based on the Lightning Network.
• 2022: Multiple trading platforms support the Lightning Network
• October 2022: The Lightning Network had 76,236 payment channels with a channel capacity of 5049 BTC.

Ecological Development: The Lightning Network ecosystem consists of the following layers from bottom to top: the underlying BTC network, core infrastructure, and various DApps. The core infrastructure includes Lightning Network solutions and node liquidity services. Above the infrastructure are applications such as payment and financial services. Currently, there are over 20 categories and more than 100 applications, covering areas such as payments, wallets, node management, browser extensions, podcasts, and streaming.

Ethereum Lightning Network:

Overview: The Lightning Network is a micropayment channel based on Ethereum, similar to the Lightning Network, which expands on-chain transactions by establishing state channels to achieve fast and low-cost ERC20 token payments.

Timeline:

• Founded in 2017, the founder was a core developer of Ethereum.
• ICO was conducted in October 2017, raising over $30 million.
• The first mainnet Alderaan version was released in May 2020
• At the end of 2021, multiple exchanges delisted the RDN token.

Currently not widely adopted, reasons include:

1. High entry barrier: When Ethereum gas fees are too high, the cost of opening a channel is too high.
2. More advanced scaling technologies have emerged: at that time, it was the only scaling solution for Ethereum, but now better solutions such as Rollup have appeared.

Ecological Development: The current ecological development is slow, and the team is transforming it to run on the Ethereum Layer 2 Rollup network to reduce the Gas fees for creating channels. It went live on Arbitrum in May 2022, becoming an L2 on top of L2. In the future, it will shift to focus on Rollups as a supplementary solution.

Celer Network:

Overview: Celer Network essentially increases the incentive layer ( CELR token ) of the Lightning Network, constructing fast and low-cost high-frequency interactive DApps through off-chain scaling technology and incentive economic models, such as e-sports platforms.

Technical Principles: Users interact in off-chain state channels, and on-chain verification only occurs when necessary, such as in the case of disputes (. Through the off-chain Address Translator (OAT), off-chain addresses can be uniquely mapped to on-chain smart contracts.

The architecture includes three layers:

• cChannel: Generalized State Channels and Sidechain Suite
• cRoute: off-chain payment routing
• cOS: off-chain application development framework and runtime environment

Timeline:

• Founded in 2018, the team comes from prestigious universities
• CELR token was issued on Binance Launchpad in March 2019
• The mainnet was launched in July 2019, releasing the first general state channel network and esports platform CelerX.

Ecological Development: With the blockchain ecosystem evolving towards a multi-chain development, Celer Network has transformed into a cross-chain supporting L2 scaling aggregation platform, launching products such as the DeFi protocol Layer2.finance, the information cross-chain protocol Celer IM, and the asset cross-chain bridge cBridge. cBridge has supported 139 tokens and 38 chains. In November 2022, it was integrated into MetaMask Bridges Beta and the zkSync 2.0 testnet.

)# 3.1.6 Application Comparison

Bitcoin Lightning Network:

• Main use: Bitcoin micropayments
• Technical Features: HTLC supports multi-hop payments
• Ecological Development: Widely applied, on-chain capacity steadily increasing
• Advantages: low fees, fast transactions, enhanced Bitcoin network scalability
• Disadvantages: required to pre-deposit funds, limited channel capacity, complex routing

Ethereum Lightning Network:

• Main use: Ethereum token payment
• Technical Features: Supports General Smart Contracts
• Ecological Development: Slow development, transitioning towards Rollup
• Advantages: supports more complex logic
• Disadvantages: High entry barrier, underdeveloped ecosystem

Celer Network:

• Main usage: high-frequency interactive DApp
• Technical Features: Added incentive layer, supports general smart contracts
• Ecological Development: Transforming into a Cross-Chain L2 Aggregation Platform
• Advantages: Strong versatility, cross-chain capability
• Disadvantage: relatively complex

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