EVG101 Part 8: Scalability I
Welcome to Part 8 of Everest’s crypto and blockchain guide! Slow transaction speeds on Bitcoin and Ethereum are one of the major stumbling blocks holding them back from widespread consumer use and adoption. In 2017, the exploding popularity of a single application, Cryptokitties, notoriously caused the processing speed of the Ethereum network to slow to a crawl. In today’s article, we will look at scaling solutions being developed to improve the transaction speeds of these networks.
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Table of Contents
- What are scaling solutions?
- What are Layer 1 and Layer 2 scaling solutions? What does it mean for a public chain to have a scaling solution built on top of it?
- What are state channels?
- What are side chains?
- What is Lightning Network?
- What is Plasma?
TLDR;
1. What are scaling solutions?
Scaling solutions are new software compatible with the existing blockchain structure which help to overcome the low throughput of blockchain transactions. Currently, the Bitcoin network can only process 7 transactions per second, while Ethereum processes 15 transactions per second. This is very slow compared to Visa, which can process up to 24,000 transactions per second. For cryptocurrencies and blockchain to disrupt traditional industries, a much higher throughput needs to be achieved for speed in payment transactions as well as good dApp performance.
2. What are Layer 1 and Layer 2 scaling solutions? What does it mean for a public chain to have a scaling solution built on top of it?
Scaling solutions can be differentiated by their layer. Layer 1 solutions can be seen as expanding the capacity of the original blockchain, whereas Layer 2 solutions add external capacity to the original blockchain. This can be seen in the visual below, where capacity is represented by the total area of the shapes. Different layer solutions help to increase the total size of the shapes in different ways.
Layer 1 solutions are solutions on the level of the original blockchain. These solutions are referred to as on-chain solutions and make changes to the blockchain structure itself. An example of this is SegWit, which allowed for an increased number of transactions per block in Bitcoin. Another example of this is sharding for Ethereum, which breaks the blockchain up into shards, each of which contains its own independent state and transaction history.
Layer 2 solutions are off-chain solutions which are compatible with and built on top of Layer 1. When people refer to public chains with scaling solutions built on top of them, they usually refer to Layer 2 off-chain solutions which work with, but do not modify, the existing structure of the blockchain. These solutions allow for increased speed at the expense of detail, since off-chain transactions are not recorded on the blockchain. Off-chain solutions allow for only essential information to be synchronized and mined. For example, there is no need for the transactions related to decentralized applications to be fully recorded on the blockchain. Examples of off-chain solutions are state channels, like Lightning Network for Bitcoin, or side chains, like Plasma for Ethereum.
3. What are state channels?
State channels are an off-chain layer 2 solution which work by establishing a direct connection between the two transacting parties. State channels work by having the parties involved each committing a set amount of funds and making an agreement with an adjudicating smart contract which holds the funds and distributes it accordingly when the state channel is closed.
Once a state channel is opened, transactions can be made without involving the main chain. The state channel tracks the state by recording the different transactions made. The “judge” smart contract ensures that assets are locked up and enforces transactions made in the state channel. When the participants in a state channel agree to close the state channel, the main chain is then updated with the final state, without any of the details of the intervening transactions, of the participants.
In Ethereum, state channels are cheaper for users as they only need to pay for gas to open and close a channel, instead of transaction fees for every transaction. State channels also enhance privacy since the transactions that occur in a state channel are not recorded publicly on the blockchain. Finally, they allow for instant finality, allowing transactions to be completed almost instantaneously instead of having to wait for the blockchain to accept it.
4. What are side chains?
Side chains are blockchains which are attached to the parent main chain using a two-way peg. They tie back to the main chain through smart contracts. Side chains are also considered a layer 2 scaling solution.
The side chain smart contract serves as an entry on the main chain which contains the rules of the child chain, records state hashes of the child chain, and allows users to move assets between the main chain and the side (child) chain. By transferring assets and conducting transactions on the side chain, the load on the main chain is decreased, which increases throughput.
To transfer assets to the side chain, one needs to send their assets to an address for it to be locked up. After a waiting period, a corresponding amount of coins (at a predetermined rate) are released for use on the side chain. The same process happens when you’re trying to move from side chain back to the parent chain.
Instead of an adjudicating smart contract, side chains require a federation, an intermediary group between the main chain and the side chain which decides when the coins a user has used are locked up or released.
Note that side chains also require enough miners to secure the side chain and protect it from malicious actors. Assets on a side chain are secured using a “challenge period”. Anyone who wants to exit a side chain and move the funds back to the main chain would be susceptible to a challenge. If someone submits proof that your exit is invalid (for example, if you’re taking more funds than you possess), then you lose a portion of the funds you have committed in setting up the side chain.
5. What is Lightning Network?
Lightning Network is a type of state channel scaling solution for the Bitcoin network. Since it serves the Bitcoin Network, its sole purpose is as a direct payment channel instead of more general transactions possible in Ethereum state channels.
6. What is Plasma?
Plasma is a side chain scaling solution for the Ethereum network.
Concluding Remarks
In this article, we went into detail on general blockchain scaling solutions like state channels and side chains. In the next section, we will talk about sharding as a scaling solution and how proof of stake (PoS), a consensus algorithm which uses a user’s stake of cryptocurrency to determine the size of their vote in achieving consensus, enables sharding.
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