Off-chain Scalability Depth Analysis

1. The Necessity of Scalability

The future vision of blockchain is to achieve decentralization, security, and scalability. However, typically, blockchain can only achieve two of these, which is known as the impossible triangle problem of blockchain. For years, people have been exploring how to enhance the throughput and transaction speed of blockchain while ensuring decentralization and security, that is, solving the scalability issue.

Definition of decentralization, security, and scalability:

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

The first major hard fork of the Bitcoin network originated from scalability issues. On August 1, 2017, Bitcoin ABC launched its client system developed to 8MB, leading to the first major hard fork in Bitcoin's history and the birth of the new cryptocurrency BCH.

The Ethereum network has also chosen to sacrifice some scalability in order 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. However, Ethereum can only process 15-45 transactions per second, leading to increased transaction costs and longer settlement times, making it difficult for most Dapps to bear operational costs. The ideal scaling solution is to increase the transaction speed and throughput of the blockchain network without sacrificing decentralization and security.

2. Types of Scalability Solutions

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

2.1 On-chain expansion

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 scaling, here we briefly list two:

• Plan 1: Expand block space 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.
• Solution Two: Sharding, which divides the blockchain ledger into several parts, with different shards responsible for different bookkeeping. Parallel computing can handle multiple transactions simultaneously; this can reduce the computational pressure on nodes and lower the entry barrier, improving transaction processing speed and the level of decentralization; however, it may reduce the overall security of the network.

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

2.2 off-chain scalability

Core concept: A scaling solution that does not change the existing Layer 1 mainnet protocol.

The off-chain scalability solutions can be further divided into Layer 2 and other solutions:

• Layer2: State Channels, Plasma, Optimistic Rollups, ZK Rollups
• Others: sidechain, Validium

3. off-chain scaling solutions

3.1 State Channels

3.1.1 Summary

State channels stipulate that users only need to interact with the mainnet when opening, closing, or resolving disputes in the channel, placing interactions between users off-chain to reduce transaction time and costs, allowing for unlimited transaction frequency.

State channels are suitable for "round-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.

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

3.1.3 Technical Principles

State Channel Workflow:

1. Participants deposit funds into the mainnet smart contract and lock them in. The channel is opened after both parties sign and confirm.
2. Participants can make unlimited free transactions off-chain.
3. Participants take turns sending status updates and signing to confirm.
4. When closing the channel, either participant can submit a transaction request on the mainnet. If approved by all signatures, it is executed immediately; otherwise, wait for the "challenge period" to end.

State channels can greatly reduce the computation load on the mainnet, improve transaction speed, and lower transaction costs.

3.1.4 Advantages and Disadvantages

Advantages:

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

Disadvantages:

• Funds need to be locked
• Establishing and closing channels requires Gas fees.
• Participants need to continuously monitor online
• Difficult to conduct multi-party transactions

3.1.5 Application

1. Bitcoin Lightning Network

   • Micro payment channels, build a transaction network through off-chain micro payment channels.
   • Proposed in 2015, mainnet version released in 2018
   • As of November 2022, there are 76,236 payment channels and 5049 BTC locked.

2. Ethereum Lightning Network

   • Micro payment channels based on Ethereum, similar to the Lightning Network
   • Established in 2017, but not widely adopted
   • Currently being transformed, planned to run on L2 network.

3. Celer Network

   • Increase the incentive layer of the Lightning Network
   • Suitable for high-frequency interactive applications, such as esports platforms
   • Launched DeFi protocol Layer2.finance, information 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 have differences in design philosophy, application scenarios, and development status. The Bitcoin Lightning Network is more mature, while the Lightning Network is currently used less, and Celer Network has expanded into more application scenarios.

3.2 Sidechains

3.2.1 Summary

The concept of sidechains was proposed in 2012, and related articles were first published in 2014. Sidechains are a form of blockchain that emerged to accelerate Bitcoin transactions and can utilize more complex contracts or improve consensus mechanisms. The results of sidechain transactions will ultimately be recorded on the main chain validator's side.

3.2.2 Timeline

• 2012/01: The concept of Bitcoin sidechains was proposed in the chatroom.
• 2014/10: The Bitcoin sidechain paper was first published.
• 2017/04: The POA Network launched its sidechain testnet based on the Ethereum Proof of Authentication consensus.
• 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 launched, Ethereum sidechain Matic PoS Chain mainnet launched
• 2021/02: Matic Network was renamed to Polygon Network
• 2021/02: The Axie Infinity game sidechain Ronin mainnet starts running
• 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 main chain:

1. Two-way anchoring ( Symmetric Pegged ): The main chain and side chain validators record each other's current status in real time.

2. Incoherent anchoring ( Asymmetric Pegged ): Sidechain validators monitor mainchain activities, but the mainchain cannot confirm the sidechain status, requiring the introduction of the Certifiers mechanism.

Sidechain Mechanism Summary:

• Assets from the main chain to the side chain: the main chain locks assets, and the side chain generates wrapped asset
• Assets from sidechain to mainchain: sidechain destroys wrapped asset, mainchain unlocks asset

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

3.2.4 Advantages and Disadvantages

Advantages:

• High Scalability
• Quick Confirmation
• Low transaction fees
• Can achieve complex smart contracts

Disadvantages:

• Security relies on sidechain consensus mechanism
• Lower degree of decentralization
• Cross-chain transfers require a long waiting time
• There is a risk of single point of failure

3.2.5 Application

1. xDai ( is now renamed Gnosis Chain )

   • The token $xDai is pegged to the US dollar at a 1:1 ratio
   • Use PoSDAO validation model
   • Mainnet launched in September 2018, merged with Gnosis in April 2022
   • The current TVL is about $53mil, with 35 ongoing projects.

2. Polygon

   • Established in 2017, mainnet launched in June 2020
   • Provide sidechain Matic PoS Chain and Plasma solution Matic Plasma Chain
   • In February 2021, the brand was upgraded to Polygon, transforming into a scalability solution aggregator.
   • Currently has 37k+DApps, 1.8B total transactions, 135M+ users

3. Ronin

   • Axie Infinity dedicated sidechain
   • Adopting PoA(Proof of Authority) consensus mechanism
   • Mainnet launched in March 2021
   • Suffered a hacker attack of $624 million in March 2022

3.2.6 Application Comparison

xDai, Polygon, and Ronin differ in design philosophy, application scenarios, and current development status. xDai focuses on stablecoin payments, Polygon offers diversified scaling solutions, and Ronin specializes in gaming scenarios. Each has its own characteristics and advantages.

3.3 Plasma

3.3.1 Summary

Plasma is a framework for building scalable DApps, aimed at minimizing user trust in off-chain Operators. Even if an Operator acts maliciously, Plasma can prevent user funds from being stolen. The fundamental principle of Plasma is that if there is a security failure in the Plasma chain, all user assets can still be withdrawn and returned to the mainnet.

3.3.2 Timeline

• 2017/08: Vitalik and Joseph Poon released the Plasma white paper
• 2018/01: Vitalik proposed Plasma MVP
• 2018/03: Vitalik proposed Plasma Cash
• 2018/06: Dan Robinson proposed Plasma Debit
• 2018/11: BANKEX Foundation proposed Plasma Prime
• Since 2019: Ethereum community begins