2019 Blockchain Layer 2 Solution Review

Table of contents

1. Why do we need Layer 2 solutions

2. Bitcoin Lightning Network

3. ETH scalability solution—Caspar vs. Plasma vs. Sharding

4. Layer 2 solution review

1. Why do we need Layer 2 solutions

Blockchain technology is powerful yet complex in terms of configuration, programming and operation. Why do we need Layer 2 solutions? This is mainly related to the key performance indicator (KPI) of blockchain transactions per second (TPS), which is often compared with traditional centralized solutions. As shown in the diagram below (though dated but easy to illustrate), the Visa TPS requirement is about 47K per second. If you look at the Taobao Double Eleven Shopping Festival, the TPS can reach more than 100K per second. Therefore, before the blockchain can challenge traditional centralized solutions, there is an urgent need to significantly improve TPS. This is also known as the "scalability problem".

In blockchain technology, there is a so-called "impossible triangle", which refers to security, scalability and decentralization. You can only achieve two of the three but not all of them. Ripple (XRP) is considered a centralized solution to achieve the security and TPS that people expect.

There are already a few protocol projects addressing the scalability problem, and the image below shows some of the contenders for Layer 2 solutions.

2. Bitcoin Lightning Network

As one can observe from the blockchain network, the current average transaction value is about $50 per transaction, with a transaction fee of $20 per transaction, which translates to a transaction cost of 40%. Also, it will take about an hour (that is, 6 blocks to confirm the transaction) Therefore, the core developers of Bitcoin developed the Bitcoin Lightning Network to increase the TPS of the blockchain.

The Lightning Network is a "Layer 2" payment protocol that runs on top of blockchain-based cryptocurrencies such as Bitcoin. It supports fast transactions between participating nodes and has been hailed as a solution to Bitcoin's scalability problems.

3. ETH scalability solution—Caspar vs. Plasma vs. Sharding

Similar to Ethereum, there are different solutions to the scalability problem, mainly including:

Casper--Casper refers to the consensus algorithm proof of Ethereum's long-term planning. It thus promises to be more energy-efficient and egalitarian than the current proof-of-work mechanism.

Plasma - Plasma is another Ethereum standard solution that involves a second layer of smart contracts on the main blockchain. Similar to sharding, this approach means that the entire network does not have to verify and broadcast every contract transaction. In theory, Plasma will replace server farms with a peer-to-peer network through which users collectively can collectively run DApps in a scalable and decentralized manner.

Sharding ---- Sharding basically divides data into multiple servers rather than just a single server [similar to parallel computing]. Buterin elaborated on this on Reddit that essentially the ledger will be decentralized in this scaling process;

“This is a (partial) proof of concept based on a fork choice rule mechanism for how sharding works on the current ethereum mainchain using specialized randomness beacons and sharding in states where shard block times are < 10 seconds.”

4. Layer 2 solution review

The BTC and ETH communities are large enough to develop their own scalability solutions. What about other blockchain platforms? Who will solve their scalability problems? The following Layer 2 solution came into being.

This section provides an overview of the main Layer 2 solutions as follows:

State Channel

Celer Network

Connext

Counterfactual

FunFair

Lightning network

Liquidity Network

Machionmy

Magmo

Parsec

Perun

Pisa

Raiden Network

SpankChain

Sprites

Trinity

State Channel

Alacris

Livepeer

Loom Network

MATIC Network

OmiseGo

Plasma

POA Network

SKALE

Side Chain

AlphaWallet

Oraclize

STARK

TEEX

Transmute

TrueBit

Off-Chain Computation

Finality Labs

L4

4.1.1 Celer Network

4.1 State channel

• The Celer Network is the first off-chain operational network with a coherent technical and economic architecture that enhances blockchain scalability at the entire Internet level. Celer Network can scale out to billions of off-chain transactions per second, requires no additional permission, decentralizes and ensures privacy. It consists of a layered architecture with important technical innovations at each layer:

• A channel building kit that goes beyond simple payments, flexibly supports generalized off-chain dApp state transitions, and has sidechain-like channels with minimal capital lockup, etc.;

• The first ever provably state-of-the-art routing algorithm with 15x higher transaction throughput than state-of-the-art solutions;

An off-chain operating system that can greatly simplify the development and use of off-chain applications on various platforms.

4.1.2 Counterfactual

In addition, Celer Network also proposes a principled off-chain cryptoeconomic design that promotes fair transactions to achieve scalability.

Ethereum cannot scale and it is difficult for developers to apply Layer 2 technologies like state channels to Ethereum. Therefore, we need better tools for ETH development, and Counterfactual is an open source project that can solve this problem.

4.1.3 Magmo

The goal of Counterfactual is to make it easy for developers to build applications using state channels on ETH. Shown below is a project on a website, and its code on github.

4.1.4 Perun

This framework is only intended to support turn-based games whose actions do not depend on time or data outside of the channel. While this may seem restrictive, many use cases for state channels fall into this category: two-player strategy games (e.g. chess, backgammon, boxing), games of chance where probabilities appear to be fair (e.g. dice, roulette) , payment channels, etc., and many other scenarios can be built on top of this framework.

4.1.5 Pisa

The concept of channel virtualization is introduced through the virtual payment center of cryptocurrency (http://eprint.iacr.org/2017/635309), which can replace the use of hash-locked transaction payment through intermediate routing. The main advantage of channel virtualization is that once a virtual channel is established, payments can be made directly without interacting with intermediate routers. This reduces cost and latency while making it easier to use.

Pisa focuses on general-purpose state channels, which can be used to generate any application (such as payments, auctions, board voting, games, etc.). Pisa's core contribution is a new protocol that employs new third parties as custodians. The custodian is designed to help ease the new idea in state channels, which requires every participant to be online (in sync with the blockchain). [Like the Leaning Tower of Pisa Rescue]

4.2.1 Loom Network

4.2 Sidechain

You may not have heard of Loom Network, but you may have heard of Cryptozombies (crypto zombies), it teaches you to use the Ethereum platform to develop games What is Loom Network? It was Loom Network who built an infrastructure platform to help Ethereum scale.

It allows developers to run large-scale applications and is the first Ethereum scaling solution to be used in production.

4.2.2 MATIC Network

In short, you can think of Loom Network as EOS on Ethereum.

Matic Network strives to address scalability and usage issues without compromising on decentralization or leveraging the existing developer community and ecosystem. Matic Network provides side chain extension solutions for existing platforms, enhancing scalability and bringing excellent user experience to Dapps and their user functions.

4.3.1 Transmute

4.3 Off-chain computing

4.3.2 TrueBit

It is a decentralized application (dApps) development framework for managing DApp logic and dependencies, including Truffle, TestRPC (Ganache), Web3, IPFS on Ethereum.

4.3.3 AlphaWallet

Truebit is a technology that can help Ethereum with heavy or complex off-chain calculations. This makes it different from state channels and Plasma, which are more useful for the increasing total transaction volume of the Ethereum blockchain. Truebit will not allow us to do more transactions, but will allow Ethereum-based applications to do more complex things in a way that can still be verified by the main chain.

AlphaWallet was founded by a group of enthusiastic blockchain enthusiasts, experts in related fields, and business professionals who believe that this technology will affect billions of people around the world and are willing to contribute to the Ethereum community. AlphaWallet (STORMBIRD PTE.LTD.) has joined the European Economic Area to help businesses improve the technology and promote the further use of Ethereum by businesses.

5. Layer 2 Token Economics

Since Layer 2 solutions do not use tokens for any purpose, the economic incentives for innovation in the core protocol and Layer 2 infrastructure are too low, as Fred Ehrsam, Elad Gil, Vitalik Buterin, and many others have demonstrated as observed. The token model for funding projects in these domains is thus overused.

Existing off-chain solutions are often criticized for their cryptoeconomic structure. The reason for these criticisms is mainly because the tokens issued by these projects only have the function of payment intermediary, and it is a service function that may be generated in the future. Themes of this critique tend to be "This token model is just gift cards with no stable value!", "Why do we need to pay for tokens if we can pay in X (enter your favorite cryptocurrency here)?", "You Just issuing a token for the sake of owning a token!" And so the list of criticisms goes on, with increasingly strident opinions.

Celer Network started to build an off-chain token economics. They created a cEconomy concept to ensure sufficient and stable liquidity as well as safe and flexible availability. To "balance" the above trade-offs, we design cEconomy as follows with three closely related intrinsic components. This may be the most in-depth design of token economics around a Layer 2 solution to date. More information can be found here.

Liquidity Fund Guaranteed Mining Mechanism (PoLC) - In order to maintain a prosperous off-chain operating network, we need to constantly "lock" the abundant and stable liquidity in the Celer Network. PoLC is the first to make incentives. The mechanism is like a staking protocol. Participants can submit their idle liquidity (Ethereum, for a simple example) to the "Puppet Box" for a period of time, which is called a collateralized commitment contract (CCC).

Liquidity Funding Backed Auction Mechanism (LiBA) - LiBA is the second piece of the liquidity puzzle. LiBA enables state channel service providers to seek liquidity through "crowdfunding loans". Essentially, state channel service providers initiate LiBA on the Celer Network to "borrow" a fixed amount of liquidity for a period of time.