Off-chain Scalability Depth Analysis

1. The Necessity of Scalability

The future of blockchain is decentralization, security, and scalability. However, blockchain can typically only achieve two of these, referred to as the blockchain trilemma. For years, people have been exploring ways to increase blockchain throughput and transaction speed while ensuring decentralization and security, which is to solve the scalability issue.

Let's first define the decentralization, security, and scalability of blockchain:

• Decentralization: Anyone can become a node to participate in the blockchain system. The more nodes there are, the higher the degree of decentralization.
• Security: The higher the cost to gain control of the blockchain system, the higher the security.
• Scalability: The ability of the blockchain to handle a large number of transactions.

The first major hard fork of the Bitcoin network originated from scaling issues. On August 1, 2017, Bitcoin ABC launched its own client system with 8MB blocks, leading to the first major hard fork in Bitcoin's history, which resulted in the creation of a new cryptocurrency, BCH.

The Ethereum network has also chosen to sacrifice a portion of scalability to ensure the security and decentralization of the network. From the CryptoKitties in 2017, to the DeFi summer, and later the rise of on-chain applications such as GameFi and NFTs, the market's demand for throughput has been continuously increasing, but Ethereum can only process 15-45 transactions per second. This has led to increased transaction costs, longer settlement times, and most Dapps find it difficult to bear operational costs, making the entire network slow and expensive for users, highlighting the urgent need to address blockchain scalability issues.

2. Types of Scaling Solutions

We classify the scaling solutions into two major categories: on-chain scaling and off-chain scaling, based on the criterion of "whether to change a layer of the mainnet."

2.1 On-Chain Scalability

Core concept: A solution to achieve scalability by changing a layer of the main network 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:

• Expand block space, which means increasing the number of transactions packed into each block, but it will reduce the degree of "decentralization".
• Sharding, dividing the blockchain ledger into several parts, with different nodes responsible for different accounting, can reduce the computational pressure on nodes, but it will lower the overall network's "security".

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

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 further divided into Layer 2 and other solutions:

• Layer2:
  • State Channels
  • Plasma
  • Rollups(Optimistic Rollups, ZK Rollups)
• Others:
  • Sidechains
  • Validium

3. off-chain Scaling Solutions

3.1 State Channels

3.1.1 Overview

State channel regulations stipulate that users only need to interact with the mainnet when opening, closing, or resolving disputes in the channel, keeping interactions between users off-chain to reduce the time and monetary costs of transactions and to achieve unlimited transaction frequency.

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

3.1.3 Technical Principles

State Channels Workflow:

1. Alice and Bob deployed a multi-signature contract on the mainnet and locked in funds.
2. Alice and Bob conducted multiple transactions off-chain, with both parties signing to confirm each transaction.
3. When closing the channel, Alice submits the final state to the contract. If Bob signs to approve, the contract distributes funds based on the final state. If Bob does not respond, funds can only be received after the challenge period ends.

3.1.4 Advantages and Disadvantages

Advantages:

• Instant finality
• Low transaction fees
• High Privacy

Disadvantages:

• High cost of channel initialization
• Participants need to stay online continuously.
• Poor liquidity of locked funds
• Difficult to apply in general scenarios.

3.1.5 Application

1. Bitcoin Lightning Network

   • Overview: A micro-payment channel in the Bitcoin network, consisting of an off-chain micro-payment channel and intermediaries to form a transaction network.
   • Timeline: Proposed in 2015, mainnet version released in 2018, multiple exchanges supporting the Lightning Network in 2022.
   • Ecosystem: There are more than 20 categories and over 100 applications, including payments, wallets, node management, etc.

2. Ethereum Lightning Network

   • Overview: A micropayment channel based on Ethereum, similar to the Lightning Network.
   • Timeline: Established in 2017, first Light Client released in 2020.
   • Development impeded: High entry barriers and the emergence of more advanced scaling technologies have led to limited adoption.

3. Celer Network

   • Overview: Increase the incentive layer of the Lightning Network, suitable for high-frequency interactive applications such as esports platforms.
   • Timeline: Founded in 2018, mainnet launched in 2019.
   • Ecosystem: Launched DeFi protocol Layer2.finance, cross-chain protocol Celer IM, and asset cross-chain bridge cBridge.

3.1.6 Application Comparison

The Bitcoin Lightning Network, Ethereum Lightning Network, and Celer Network each have their own characteristics in terms of functionality, security, and level of decentralization, making them suitable for different scenarios.

3.2 Sidechains

3.2.1 Summary

Sidechains are a form of blockchain created to accelerate transactions on the main chain and can utilize more complex contracts or improve consensus mechanisms. Sidechains are infrastructure that attaches to the main chain and assists in solving problems for the main chain.

3.2.2 Timeline

• 2012/01: The concept of Bitcoin sidechains was first proposed
• 2014/10: Publication of Bitcoin sidechain paper
• 2017-2022: Multiple sidechain projects were launched one after another, such as POA Network, Matic Network( later renamed to Polygon), xDai Chain, etc.

3.2.3 Technical Principles

There are mainly two types of cross-chain technologies for sidechains:

1. Symmetric Pegged( Bi-directional Anchoring):

   • Main chain and side chain validators record each other's current status in real-time
   • Use bidirectional SPV technology for information transmission
   • When main chain assets are transferred to the side chain, SPV-Locked Output is generated, which can only be unlocked by side chain validators.

2. Asymmetric Pegged(不协调锚定):

   • Sidechain validators monitor mainchain activities and can actively record transactions from the mainchain to the sidechain.
   • Sidechain to mainchain transactions require the introduction of the Certifiers mechanism, which is verified and signed by Certifiers.

3.2.4 Advantages and Disadvantages

Advantages:

• Enables fast transactions and low fees
• Can achieve Turing completeness
• Customizable consensus mechanism

Disadvantages:

• Security relies on sidechain validators
• Main sidechain asset transfers require waiting time
• Lower degree of decentralization

3.2.5 Application

1. xDai( is now on Gnosis Chain)

   • Overview: DAI-based sidechain, transaction fees are easy to calculate
   • Timeline: Launched in 2018, merged with Gnosis in 2022
   • Ecosystem: Ranked 20th in DeFi Llama, with a TVL of approximately 53 million USD.

2. Polygon

   • Overview: Ethereum scaling solution aggregator
   • Timeline: Founded in 2017, mainnet launched in 2020, renamed to Polygon in 2021
   • Ecosystem: Over 37k+Dapps, 1.8B total transactions, and 135M+ users

3. Ronin

   • Overview: Sidechain developed for the Axie Infinity game
   • Timeline: Mainnet launched in March 2021, hacked in March 2022.
   • Ecosystem: Mainly serves applications related to Axie Infinity

3.2.6 Application Comparison

xDai, Polygon, and Ronin have different technical characteristics, application scenarios, and ecological developments, each suitable for different usage needs.

3.3 Plasma

3.3.1 Overview

Plasma is a framework for building scalable Dapps, designed to minimize users' trust in sidechain Operators. Even if the Operator acts maliciously, Plasma can prevent users' 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 new Layer 2 scaling solutions "Rollups"

3.3.3 Technical Principles

Plasma Core Idea:

• off-chain execution: Most of the work is processed outside the main network.
• State Commitment: The Operator regularly publishes the Merkle Root on the mainnet as a state commitment.
• Exit mechanism: Users can submit Merkle Proof to prove ownership of funds.

Usage process:

1. Users deposit funds into the mainnet contract.
2. Users trade on the Plasma chain
3. The operator packages the transaction and submits the Merkle Root to the mainnet.
4. Users can initiate a withdrawal request and can withdraw funds after the challenge period.

3.3.4 Advantages and Disadvantages

Advantages:

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

Disadvantages:

• Long exit time
• Users need to continuously monitor the Plasma chain
• Large-scale exit issue
• Data availability issues

3.3.5 Application

1. Plasma Group → Optimism

   • Shifted focus to researching Optimistic Rollup in 2019

2. OMG Network → Boba Network

   • The mainnet launched in 2020, using More Viable Plasma technology.
   • Renamed to Boba Network in 2021, shifted to Optimistic Rollup

3. Polygon

   • Released Matic Plasma Chain in 2020
   • Backward-looking full-stack L2 solutions, including Rollups technology

3.3.6 Summary

Plasma is a technical transition solution, and its main applications have shifted to other scaling technologies such as Rollups.

3.4 Rollups

3.4.1 Overview

The core idea of Rollups is to place the computation process and state storage off-chain, while the on-chain components consist of state commitments and compressed transaction data. Currently, they are mainly divided into two types: Optimistic Rollups and ZK Rollups.

3.4.2 Technical Principles

Roll