Off-chain Scaling Depth Analysis

1. The Necessity of Scalability

The future vision of blockchain is decentralization, security, and scalability. However, it is often only possible to achieve two of these, which is known as the blockchain trilemma. For years, people have been exploring ways to improve the throughput and transaction speed of blockchain while ensuring decentralization and security, that is, to solve the scalability issue.

Definition of 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, the higher the security, which can resist a larger proportion of attacks.
• Scalability: The ability of a blockchain to handle a large number of transactions.

The first major hard fork of the Bitcoin network originated from scalability issues. The Ethereum network also chose to sacrifice some scalability to ensure the security and decentralization of the network.

Since the rise of CryptoKitties in 2017, along with DeFi summer, 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, longer settlement times, and many Dapps struggling to bear operating costs.

The ideal scalability solution is to improve the transaction speed and throughput of the blockchain network without sacrificing decentralization and security.

2. Types of Scalability Solutions

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

2.1 On-chain Scalability

Core concept: A solution to achieve scalability by altering a layer of the mainnet protocol, with the current main solution being sharding.

There are various solutions for on-chain scalability, such as:

• Expand block space, increase the number of transactions packaged in each block, but it will raise the requirements for nodes and reduce the level of decentralization.
• Sharding, dividing the blockchain ledger into several parts, with different nodes responsible for different bookkeeping, can improve transaction processing speed and the degree of decentralization, but it may reduce the overall security of the network.

Changing a layer of the mainnet protocol may produce unpredictable negative effects, and any minor security vulnerability at the underlying level can seriously threaten the security of the entire network.

2.2 off-chain expansion

Core concept: A scaling solution that does not change the existing layer one mainnet protocol.

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

• Layer2: including State Channels, Plasma, Rollups, etc.
• Other solutions: such as sidechains

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, allowing user-to-user interactions to be conducted off-chain to reduce the time and monetary costs 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: Release of the draft white paper for the Lightning Network
• 2015/11: Jeff Coleman first systematically summarized the concept of State Channel.
• 2016/01: The Bitcoin Lightning Network white paper was officially published.
• 2017/11: The first State Channel design specification based on the Payment Channel framework, Sprites, was proposed.
• 2018/06: Counterfactual proposed a detailed design for Generalized State Channels
• 2018/10: The concepts of State Channel Networks and Virtual Channels were proposed.
• 2019/02: N-Party Channels concept expansion, Nitro protocol establishment
• 2019/10: Pisa expands the concept of Watchtowers to solve the issue of participants being continuously online.
• 2020/03: Hydra proposed Fast Isomorphic Channels

3.1.3 Technical Principles

The workflow of State Channels:

1. Users deposit funds into the mainnet through smart contracts to activate the state channel.
2. Users conduct multiple transactions off-chain, mutually signing to confirm status updates.
3. Either party may submit a request to close the channel to the mainnet, and if there is no dispute, the final state will be executed.
4. In case of disputes, the contract will wait for the "challenge period" to end before confirming the final status.

Compared to traditional on-chain interactions, State Channels can significantly reduce the computation on the mainnet, increase transaction speed, and lower costs.

3.1.4 Advantages and Disadvantages

Advantages:

• Instant transaction confirmation
• Low transaction fees
• High Privacy
• High Scalability

Disadvantages:

• Funds need to be locked in advance.
• Participants need to stay online
• Not suitable for applications with open participation
• Difficult to implement multi-party channels
• You need to wait for the challenge period when the channel is closed.

3.1.5 Application

Main applications include Bitcoin Lightning Network, Ethereum Lightning Network, and Celer Network.

Bitcoin Lightning Network:

• Proposed in 2015, mainnet version released in 2018
• Solve the Bitcoin network scaling problem through off-chain micropayment channels
• Currently, there are 76,236 payment channels, with a channel fund of 5049 BTC.

Ethereum Lightning Network:

• Established in 2017, aimed at achieving instant low-cost payments with ERC20 tokens.
• Released the first mainnet client in 2020
• Currently used less, the team is transforming it to run on L2 Rollup.

Celer Network:

• Established in 2018, it is a lightning network that adds an incentive layer.
• Suitable for high-frequency interactive applications, such as e-sports platforms
• It has currently transformed into a cross-chain communication platform.

3.1.6 Application Comparison

The Bitcoin Lightning Network, Ethereum Lightning Network, and Celer Network differ in the following aspects:

• Underlying blockchain: based on Bitcoin, Ethereum, and multi-chain
• Application Scope: Payment, Smart Contracts, and General Applications
• Development Stage: Different levels of maturity and ecological development
• Technical features: There are differences in routing algorithms, state channel designs, etc.

3.2 Sidechains

3.2.1 Summary

The concept of sidechains was first proposed in 2012, with the first related paper published in 2014. Sidechains are a form of blockchain that emerged to accelerate transactions, allowing for more complex contracts or improved consensus mechanisms. The transaction results of sidechains will ultimately be recorded on the validator side of 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 was first published
• 2017/04: POA Network testnet launched
• 2017/10: Matic Network launched
• 2017/12: POA Network Mainnet Launch
• 2018/01: Skale testnet launched
• 2018/10: xDai Chain testnet launched
• 2020/06: Skale mainnet and Matic PoS Chain mainnet launched
• 2021/02: Matic Network was renamed to Polygon Network
• 2021/02: Axie Infinity sidechain Ronin mainnet launched
• 2021/12: xDai Chain merged with Gnosis Dao
• 2022/03: POA Network merged into Gnosis Chain

3.2.3 Technical Principles

Sidechains communicate with the mainchain through bi-directional anchoring or non-coordinated anchoring. Main process:

1. Users send native assets to a special address for locking.
2. Wait for the confirmation period to end, submit proof to the sidechain.
3. Wait for the challenge period to avoid double spending attacks.
4. After completion, users can use the newly minted wrapped assets on the side chain.

The security of sidechains depends on the sidechain consensus mechanism. If someone creates assets on the sidechain that do not match the mainchain out of thin air, it may pose a risk of funds being stolen.

3.2.4 Advantages and Disadvantages

Advantages:

• High Scalability
• Quick Confirmation
• Low transaction fees
• Customizable features

Disadvantages:

• The security depends on the side chain itself.
• Requires trust in sidechain validators
• Asset cross-chain requires a long waiting time
• Semi-centralized

3.2.5 Application

Main applications include:

xDai( now Gnosis Chain):

• Ethereum sidechain, using xDai as the native token
• Mainnet launched in September 2018, merged with Gnosis in 2021
• Adopts PoSDAO consensus mechanism
• The current TVL is approximately 53 million USD.

Polygon:

• Formerly known as Matic Network, brand upgrade in 2021.
• Provide two solutions: PoS sidechain and Plasma chain.
• Currently, there are 37k+ Dapps, 1.8B total transactions, and 135M+ users.

Ronin:

• Axie Infinity dedicated sidechain
• The mainnet was launched in March 2021, using PoA consensus.
• In March 2022, suffered a $625 million hacker attack.

3.2.6 Application Comparison

xDai, Polygon, and Ronin differ in the following aspects:

• Consensus Mechanism: uses PoSDAO, PoS, and PoA respectively
• Application Scope: General, Diversified Ecosystem and Game-Specific
• Security: The number of validators and the selection mechanism are different.
• Development stage: There are differences in the level and scale of ecological development.

3.3 Plasma

3.3.1 Overview

Plasma is a framework for building scalable Dapps. It emerges as an evolutionary solution for sidechains, aiming to minimize user trust in sidechain operators. The fundamental principle of Plasma is that even if the Plasma chain experiences a security failure, all user assets can still be withdrawn and returned to the mainnet.

3.3.2 Timeline

• 2017/08: Plasma white paper released
• 2018/01: The first official Plasma application, Plasma MVP, was proposed.
• 2018/03: Plasma Cash proposed to solve the large-scale exit problem.
• 2018/06: Plasma Debit proposed
• 2018/11: BANKEX proposed Plasma Prime
• Since 2019: The Ethereum community began exploring Rollups solutions.

3.3.3 Technical Principles

Core idea of Plasma:

• off-chain execution: Most of the work is processed outside the mainnet
• State Commitment: Submit state to the mainnet via Merkle Root
• Exit mechanism: Allows users to safely exit the Plasma chain

Main process:

1. Users deposit into the Plasma chain on the mainnet.
2. Conduct transactions on the Plasma chain
3. The operator regularly submits status commitments to the mainnet.
4. Users can initiate exit requests at any time.
5. After the challenge period, users can retrieve their assets on the mainnet.

3.3.4 Advantages and Disadvantages

Advantages:

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

Disadvantages:

• Complex exit mechanism
• Regular monitoring of the Plasma chain is required.
• Mass Exit