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, which is 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, solving the scalability problem.

Let's first 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 over the blockchain system, the higher the security, and the chain can resist attacks from a larger proportion of participants.
• Scalability: The ability of a blockchain to handle a large number of transactions.

The first significant 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 problems. Since 2015, there have been disagreements within the Bitcoin community regarding scalability, ultimately leading to the first significant hard fork in Bitcoin's history on August 1, 2017, which resulted in the creation of a new cryptocurrency, BCH.

Similarly, the Ethereum network also chose to sacrifice some scalability to ensure the security and decentralization of the network. Although Ethereum does not impose a block size limit like Bitcoin, it indirectly sets a cap on the gas fees that can be accommodated in a single block, all aimed at achieving Trustless Consensus and ensuring the widespread distribution of nodes.

From the rise of CryptoKitties in 2017, the DeFi summer, to the later emergence of on-chain applications like GameFi and NFTs, the market's demand for throughput has been continuously increasing. However, Ethereum can only process 15-45 transactions per second. This has led to increased transaction costs and longer settlement times, making it difficult for most DApps to bear operating costs. The entire network has become slow and expensive for users, and the blockchain scalability issue urgently needs to be addressed. The ideal scalability solution is to increase the network's transaction speed and throughput as much as possible without sacrificing decentralization and security.

2. Types of Scalability Solutions

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

2.1 on-chain expansion

Core concept: a solution that achieves scalability by altering 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 but will briefly list two:

• Plan One is to expand the block space, that is, to increase the number of transactions packed in each block, but this will raise the requirements for high-performance node devices and reduce the degree of "decentralization".

• Plan two is sharding, which divides the blockchain ledger into several parts, with different nodes responsible for different accounting. This can reduce the computational pressure on nodes and the threshold for joining, improving transaction processing speed and the degree of decentralization; however, it means that the overall network's computing power is dispersed, which may reduce the "security" of the entire network.

Changing a layer of the mainnet protocol can have unpredictable negative impacts, as any subtle security vulnerability in the underlying layer can severely threaten the security of the entire network.

2.2 off-chain scalability

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

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

• Layer2: The second layer network built on top of the main chain
• Sidechain: An independent blockchain that runs in parallel with the main chain
• Plasma: a special type of sidechain
• Validium: off-chain data availability scaling solution

3. Off-chain scaling solutions

3.1 State Channels

3.1.1 Overview

State channels stipulate that users only need to interact with the mainnet when opening, closing, or resolving disputes in the channel, allowing interactions between users to occur off-chain, thereby reducing the time and monetary costs of transactions and enabling an unlimited number of transactions.

State channels are simple P2P protocols suitable for "turn-based applications," such as a two-player chess game. Each channel is managed by a multi-signature smart contract running on the mainnet, which controls the assets deposited into the channel, verifies state updates, and arbitrates disputes between participants. After the network deploys the contract, participants deposit funds and lock them, and after both parties sign their confirmation, the channel is officially opened. The channel allows for unlimited off-chain free transactions between participants as long as the net transfer value does not exceed the total amount of tokens deposited. Participants take turns sending state updates to each other, waiting for the other party to sign and confirm. Normally, agreed-upon state updates are not uploaded to the mainnet; only in the case of disputes or when closing the channel will confirmation from the mainnet be relied upon. When closing the channel, either participant can submit a transaction request on the mainnet, which will be executed immediately if all signatures are approved; otherwise, they must wait for the "challenge period" to end before receiving the remaining funds.

In summary, the state channel solution can greatly reduce the computation load on the mainnet, enhance transaction speed, and lower transaction costs.

(# 3.1.2 Timeline

• 2015/02: Joseph Poon and Thaddeus Dryja published the draft of the Lightning Network white paper.
• 2015/11: Jeff Coleman first systematically summarized the concept of State Channel, suggesting that Bitcoin's Payment Channel is a sub-case of State Channel.
• 2016/01: Joseph Poon and Thaddeus Dryja officially published the Lightning Network white paper, proposing the Payment Channel as a scalability solution for the Bitcoin Lightning Network.
• 2017/11: The first State Channel design specification 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 built on this idea.
• 2019/10: Pisa expanded the concept of Watchtowers to address the need for all participants to remain online.
• 2020/03: Hydra proposed Fast Isomorphic Channels.

)# 3.1.3 Technical Principles

The workflow of state channels:

1. Alice and Bob deposit funds from their personal EOA into an on-chain contract address, where these funds are locked in the contract. After both parties sign to confirm, the state channel is officially opened.

2. Alice and Bob can conduct unlimited off-chain transactions and communicate with each other through encrypted signed messages. Both parties need to sign each transaction to prevent double spending malice. Through these messages, they propose updates to their account statuses and accept the updates proposed by the other party.

3. If Alice wants to close the channel and end the transaction, she needs to submit the final state of her account to the contract. If Bob signs to approve, the contract will return the locked funds to the corresponding user based on the final state. If Bob does not respond with a signature, the contract will return the funds to the corresponding user after the challenge period ends.

![Ten Thousand Words Depth Report: Comprehensive Analysis of off-chain Scaling]###https://img-cdn.gateio.im/webp-social/moments-ead28de03be9fc22dcfe3f679ee36bc5.webp###

(# 3.1.4 Advantages and Disadvantages

Advantages:

• Instant Confirmation
• High Throughput
• Low cost
• Good privacy

Disadvantages:

• Need to lock funds
• Participants must remain online continuously.
• Difficult to handle multi-party transactions
• Not suitable for complex smart contracts
• Centralized Risk
• Poor user experience

)# 3.1.5 Application

Bitcoin Lightning Network:

• Small payment channels on the Bitcoin network form a transaction network through off-chain small payments and intermediaries, addressing the scalability issue of the Bitcoin network.
• The draft of the white paper was released in February 2015, and the mainnet version was released in March 2018.
• As of November 2022, the Lightning Network has a total of 76,236 payment channels with channel funds amounting to 5049 BTC.
• The ecosystem includes over 100 applications such as payment, wallet, node management, and browser extensions.

Ethereum Lightning Network:

• A micropayment channel based on Ethereum, similar to the Lightning Network.
• Established in 2017, the first mainnet client was launched in May 2020.
• Currently not widely adopted, reasons include high usage thresholds and the emergence of more advanced scaling technologies.

Celer Network:

• Essentially, it is a Lightning Network with an added incentive layer.
• Established in 2018, the Ethereum mainnet launched in July 2019.
• 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.

3.2 Sidechains

3.2.1 Summary

The concept of sidechains was first proposed in 2012 as a form of blockchain that emerged to accelerate Bitcoin transactions. Sidechains can utilize more complex contracts or improve consensus mechanisms ### such as PoS ###, or adjust block parameters to make sidechains serve specific functions. The transaction results of sidechains ultimately get recorded on the validator's end when sent back to the main chain. This blockchain model is not a new form of blockchain but rather infrastructure attached to the main chain that assists in solving issues for the main chain.

(# 3.2.2 Timeline

• 2012/01: The concept of Bitcoin sidechains was proposed in chat rooms.
• 2014/10: The Bitcoin sidechain paper is first published: Symmetric Pegged and Asymmetric Pegged
• 2017/04: The POA Network's sidechain testnet based on the Ethereum Proof of Authentication consensus goes live.
• 2017/10: Matic Network launched
• 2017/12: POA Network mainnet launched
• 2018/01: Skales testnet launched
• 2018/10: xDai Chain testnet goes live
• 2020/06: Skale mainnet launched
• 2020/06: Ethereum sidechain Matic PoS Chain mainnet launched
• 2021/02: Matic Network was renamed to Polygon Network
• 2021/02: The Axie Infinity game side chain Ronin mainnet begins 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

The technical principles of sidechains include two main cross-chain technologies:

Symmetric Pegged:

• The validators of the main chain and side chain record each other's current status in real time.
• Use bidirectional SPV technology for information transmission
• When the main chain token is transferred to the side chain, a special output is generated that can only be unlocked by side chain validators.
• Need to wait for the confirmation period and contest period to avoid double spending attacks.

Asymmetric Pegged:

• Sidechain validators need to monitor mainchain activities in real-time.
• The transfer from the main chain to the side chain ### forward transaction ### is actively recorded by the side chain.
• Transfers from sidechain to mainchain ( backward transaction ) need to introduce the Certifiers mechanism.
• Certifiers record key information and transmit it back to the main chain through aggregated signatures.

Sidechain Mechanism Summary:

• Main Chain → Side Chain: Main chain locks assets, side chain generates wrapped asset
• Sidechain → Mainchain: Sidechain destroys wrapped asset, Mainchain unlocks asset

The security of sidechain assets depends on the consensus mechanism of the sidechain. If someone creates assets out of thin air on the sidechain, there may be a risk of funds being stolen.

(# 3.2.4 Advantages and Disadvantages

Advantages:

• Good scalability
• Highly customizable
• Does not affect the security of the main chain.
• Experimental new features

Disadvantages:

• Security is relatively weak
• Cross-chain operations are complex
• Liquidity Distribution
• Need an independent incentive mechanism
• Centralization Risk

)# 3.2.5 Application

xDai### now Gnosis Chain###:

• Mainnet launched in September 2018
• Adopt PoSDAO verification model
• Merged with Gnosis DAO in November 2021
• The current TVL is approximately $53M, with 35 ongoing projects.

Polygon:

• Matic Network was established in 2017 and renamed Polygon in February 2021.
• In June 2020, the mainnet launched Matic PoS Chain and Matic Plasma Chain.
• Currently shifting to a full-stack L2 solution
• Over 37k+ DApps, 1.8B total transactions, 135M+ users

Ronin:

• Mainnet launched in March 2021, specializing in