Off-chain Scalability Depth Analysis

1. The Necessity of Scalability

The future vision of blockchain is to achieve decentralization, security, and scalability, but it is often only possible to satisfy two of these at the same time, which is known as the "impossible triangle problem" of blockchain. For years, people have been exploring how to improve the throughput and transaction speed of blockchain while ensuring decentralization and security, that is, to solve the scaling problem.

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

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

Both the Bitcoin and Ethereum networks have chosen to sacrifice some scalability in order to ensure network security and decentralization. However, with the rise of on-chain applications, the market's demand for throughput continues to increase, resulting in higher transaction costs and longer settlement times, making it difficult for most DApps to bear operational costs. The ideal scaling solution is to improve the transaction speed and throughput of the blockchain network without sacrificing decentralization and security.

2. Types of Scaling Solutions

The expansion plan can be divided into two main categories: on-chain expansion and off-chain expansion, based on whether it changes the first layer of the mainnet.

2.1 On-chain Scaling

Core concept: A solution that achieves scalability by altering a layer of the mainnet protocol, with the current primary solution being sharding.

The main solutions for on-chain scaling include:

1. Expand block space, increase the number of transactions packed in each block, but it will raise node requirements and reduce the degree of decentralization.

2. Sharding, which divides the blockchain ledger into several parts, with different nodes responsible for different bookkeeping, can reduce node pressure, improve transaction processing speed and the degree of decentralization, but may decrease the overall security of the network.

Changing a layer of the mainnet protocol may have unpredictable negative effects, and any subtle security vulnerabilities at the underlying level could severely threaten the security of the entire network.

2.2 off-chain scaling

Core concept: an expansion solution that does not change the existing layer one mainnet protocol.

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

• Layer2: includes state channels, sidechains, Plasma, Rollups, etc.
• Other solutions: including Validium, etc.

3. Off-chain scaling solutions

3.1 State Channels

3.1.1 Overview

State channels stipulate that users only need to interact with the main network when the channel is opened, closed, or when disputes are resolved. User-to-user interactions are conducted off-chain, thereby reducing transaction time and costs, and allowing for an unlimited number of transactions.

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: Proposed the first design specification for State Channel based on the Payment Channel framework, Sprites.
• 2018/06: Counterfactual proposed a detailed design for Generalized State Channels.
• 2018/10: Proposed the concepts of State Channel Networks and Virtual Channels.
• 2019/02: The concept of state channels was expanded to N-Party Channels, and Nitro is the first protocol built on this idea.
• 2019/10: Pisa expanded the concept of Watchtowers to solve the problem of participants needing to be continuously online.
• 2020/03: Hydra proposed Fast Isomorphic Channels.

3.1.3 Technical Principles

The workflow of state channels is as follows:

1. Users deposit funds in the mainnet smart contract to open the channel.
2. Users can conduct unlimited transactions off-chain and communicate with each other through signed messages.
3. When closing the channel, the user submits the final state to the contract. If both parties sign to confirm, the contract distributes the funds according to the final state; if there is a dispute, it is necessary to wait for the challenge period to end.

3.1.4 Advantages and Disadvantages

Advantages:

• Instant Confirmation
• Low fees
• High Privacy
• Suitable for frequent small transactions

Disadvantages:

• Need to lock funds in advance
• Not applicable for multi-party transactions
• Participants must remain online.
• You need to wait for the challenge period when closing the channel.

3.1.5 Application

Main applications include:

1. Bitcoin Lightning Network: A micropayment channel for the Bitcoin network that enables fast and low-cost transactions.

2. Ethereum Lightning Network: A micropayment channel based on Ethereum, aimed at achieving instant, low-cost, and scalable ERC20 token payments.

3. Celer Network: Adds an incentive layer to the Lightning Network, suitable for high-frequency interaction types of DApps.

3.1.6 Application Comparison

The Bitcoin Lightning Network, Ethereum Lightning Network, and Celer Network have certain differences in technical implementation, application scenarios, and ecological development. The Bitcoin Lightning Network is primarily used for Bitcoin payments, the Lightning Network is used for Ethereum token payments, while Celer Network has a broader range of applicability.

3.2 Sidechains

3.2.1 Overview

Sidechains are a form of blockchain that emerged to accelerate transactions on the main chain, and can utilize more complex contracts or improve consensus mechanisms. The transaction results of the sidechain will ultimately be recorded on the main chain validator's end.

3.2.2 Timeline

• 2012/01: The concept of Bitcoin sidechains was proposed in chat rooms.
• 2014/10: Publication of the Bitcoin sidechain paper
• 2017/04: POA Network testnet launched
• 2017/10: Matic Network launched
• 2017/12: POA Network mainnet launch
• 2018/01: Skales testnet launched
• 2018/10: xDai Chain testnet launched
• 2020/06: Skale mainnet launch
• 2020/06: Ethereum sidechain Matic PoS Chain mainnet launched
• 2021/02: Matic Network was renamed to Polygon Network
• 2021/02: Axie Infinity game sidechain Ronin mainnet operation
• 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

There are mainly two ways for sidechains to communicate with the mainchain:

1. Bi-directional Anchoring ( Symmetric Pegged ): The validators of the main chain and side chain record each other's block header information in real time.

2. Incoherent Anchoring ( Asymmetric Pegged ): Sidechain validators monitor mainchain activity, but the mainchain does not record sidechain information. A Certifiers mechanism needs to be introduced to validate transactions returned from the sidechain.

Sidechain Mechanism Summary:

• Assets from the main chain to the side chain: The main chain locks the assets, and the side chain generates wrapped assets.
• Assets from side chain to main chain: side chain destroys packaged assets, main chain unlocks assets.

The security of sidechain assets depends on the consensus mechanism of the sidechain.

3.2.4 Advantages and Disadvantages

Advantages:

• Higher transaction throughput
• Lower transaction fees
• Flexible application scenarios
• Does not affect main chain security

Disadvantages:

• Additional trust assumptions
• Cross-chain bridges may have security vulnerabilities.
• Liquidity Distribution

3.2.5 Application

Main applications include:

1. xDai( now Gnosis Chain): uses $xDai as transaction fees and adopts PoSDAO consensus mechanism.

2. Polygon: Ethereum scaling solution aggregator, providing PoS sidechains and Plasma chains.

3. Ronin: A sidechain developed for the Axie Infinity game, using the PoA consensus mechanism.

3.2.6 Application Comparison

xDai, Polygon, and Ronin differ in their consensus mechanisms, application scenarios, and ecological development. xDai is primarily used for payments, Polygon is a multi-functional scaling solution, and Ronin focuses on gaming applications.

3.3 Plasma

3.3.1 Overview

Plasma is a framework for building scalable DApps, designed to minimize the user's trust in the sidechain Operator. Even if the Operator acts maliciously, Plasma can prevent the user's funds from being stolen.

3.3.2 Timeline

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

3.3.3 Technical Principles

The core idea of Plasma:

• off-chain execution: Most of the work is processed outside the mainnet
• Status Commitment: The Operator regularly submits the Merkle Root on the mainnet.
• Exit mechanism: Users can withdraw funds through Merkle Proof.

Plasma main process:

1. Users deposit funds on the mainnet
2. Users trade on the Plasma chain.
3. The operator packs the transaction and submits the Merkle Root to the mainnet.
4. Users can exit the Plasma chain through Merkle Proof.

3.3.4 Advantages and Disadvantages

Advantages:

• High Throughput
• Low transaction fees
• Inherit mainnet security

Disadvantages:

• Complex exit mechanism
• Data availability issues
• A large-scale exit may lead to congestion.
• Limited smart contract functionality

3.3.5 Application

Main applications include:

1. Plasma Group: transitioned to Optimism, focusing on Optimistic Rollup research.

2. OMG Network: later renamed Boba Network, shifted to Optimistic Rollup solution

3. Polygon: provides Plasma chains, with a later focus on Rollup technology.

3.3.6 Summary

Plasma is a transitional technology solution that is limited by technology and has not been widely adopted. Most projects have since turned to Rollup solutions.

3.4 Rollups

3.4.1 Summary

The core idea of Rollups is to place computation and state storage off-chain, while storing state commitments and compressed transaction data on-chain. They are mainly divided into two categories: Optimistic Rollups and ZK Rollups.

3.4.2 Technical Principles

Main technical features of Rollups:

• off-chain virtual machine: complete transaction calculations and state changes
• Transaction Compression: Reduce the amount of on-chain storage data
• Status Commitment: Regularly submit the state root on the mainnet
• Data availability: Transaction data is stored in the mainnet calldata

Rollups transaction cost = L1 data storage cost + L2 computation processing cost

3.4.3 Advantages and Disadvantages

Advantages:

• High Throughput
• Low transaction fees
• Inherit the security of the mainnet
• Go Trustless

Disadvantages:

• Withdrawal Delay