Table of contents
Introduction
The scalability problem of blockchain
What are off-chain scaling solutions?
Introduction to Sidechain
What is a sidechain?
How sidechains work
Why use sidechains?
Payment channel introduction
What is a payment channel?
How Payment Channels Work
Payment Path
Summarize
Introduction
Broadly speaking, scalability refers to a system’s ability to scale in response to growing demand. In computing, you can improve computer performance through hardware upgrades, which speeds up some tasks. When it comes to blockchain scalability, we generally mean improving performance so that more transactions can be processed.
Protocols like Bitcoin have many advantages, but they lack scalability. If Bitcoin were run on a centralized database, it would be much easier for administrators to increase processing speed and throughput. However, Bitcoin's value proposition (such as censorship resistance) requires many participants to work together to synchronize copies of the blockchain.
The scalability problem of blockchain
Bitcoin nodes are relatively cheap to run, and even low-end equipment can do the job, but thousands of them need to be kept up to date, which limits their capacity.
The upper limit of a block is generally set to the number of transactions that can be processed on the chain to prevent data from growing out of control. If the data increment is too large and the growth rate is too fast, the nodes may not be able to keep up. In addition, if the block is too large, it will be difficult to relay it quickly in the network.
So, when we encounter this situation, we have a bottleneck. We can think of the blockchain as a train service with fixed departure intervals. Each carriage has a limited number of seats, and passengers must bid to secure a ticket. If everyone wants to get on the train, the price will naturally go up. Similarly, a network clogged with unconfirmed transactions will require users to pay high fees in order to prioritize their transactions.
One solution is to make the carriages larger. With more seats, more passengers can be transported, and ticket prices can be reduced. However, the carriages may still be as full as before. The carriages cannot be made larger, just like the block and gas limits cannot be increased indefinitely. Gas fees increase the cost of nodes staying in the network, because nodes can only stay in sync by upgrading their hardware.
Vitalik Buterin, the creator of Ethereum, proposed the "trilemma" of scalability to discuss the challenges facing blockchain. He believes that the protocol must balance scalability, security, and decentralization. The three are contradictory to each other, and if any two are over-emphasized, the third will inevitably be greatly compromised.
Therefore, many believe that scalability can be achieved off-chain, while security and decentralization should be optimized on the blockchain itself.
What are off-chain scaling solutions?
Off-chain expansion refers to a method that supports transaction execution but does not allow the blockchain to expand. The on-chain protocol allows users to send and receive funds, but transactions will not appear immediately on the main chain. In this regard, we’ll dive into two of the most notable developments: sidechains and payment channels.
Introduction to Sidechain
What is a sidechain?
The sidechain is an independent blockchain, but not an independent platform, and is linked to the main chain to some extent. The main chain and the sidechain can interoperate, that is, assets can flow freely between the main chain and the sidechain.
There are many ways to ensure smooth transfer of funds. In some cases, you can deposit funds into a special address and transfer assets from the main chain to the side chain. At this time, the funds are not actually transferred out, but locked in the address, and the side chain will receive the corresponding amount. A more direct method (which may be more centralized) is to send funds to the custodian, who will use the margin to exchange the funds of the side chain.
How sidechains work
Let's say our friend Alice has five bitcoins. She wants to exchange them for five equivalent coins in the Bitcoin sidechain (which we call "sidechain coins"). The sidechain we are discussing is a two-way peg, where users can transfer their assets from the main chain to the sidechain and vice versa.
Remember, sidechains are separate blockchains with different blocks, nodes, and validation mechanisms. To get the sidechain coins, Alice sends her five bitcoins to another address. This address may be owned by someone else. After receiving the bitcoins, the address owner credits Alice's sidechain address with the five sidechain coins. Additionally, this address may have some highly trustless setup where the software detects the payment and automatically credits the sidechain coins.
Alice has converted her Bitcoin holdings into sidechain coins. She can also do the reverse and convert her sidechain coins into Bitcoin. After owning assets on the sidechain, she can now freely trade on this independent blockchain. Just like the main chain, she can send or receive other people's sidechain coins.
For example, she can pay Bob one sidechain coin to buy a hoodie on Binance. When she wants to exchange it back for Bitcoin, she can send the remaining four sidechain coins to a special address. Once the transaction is confirmed, the four Bitcoins will be unlocked and transferred to the address she controls on the main chain.
Why use sidechains?
You might be wondering why you would want to use a sidechain. Couldn’t Alice just use the Bitcoin blockchain?
The answer is that sidechains may have features that Bitcoin does not. Blockchain is a carefully designed off-chain transaction system. While Bitcoin is the most secure decentralized cryptocurrency, it is not yet the leader when it comes to throughput. While Bitcoin transactions are faster than traditional methods, the speed is slightly inferior compared to other blockchain systems. Blocks can only be mined every ten minutes, and when the network is congested, fees can increase significantly.
But we have to admit that daily small payments may not require such a high level of security. If Alice goes to buy coffee, she will definitely not wait for the transaction to be confirmed. If so, her transaction will remain in the queue, and by the time the transaction is confirmed, the coffee may have gone cold.
A sidechain is not bound by such rules. It can even function without proof of work. You can choose the consensus mechanism you want, trust a single validator, or adjust any number of parameters. A sidechain can implement upgrades that the mainchain doesn’t, generate larger blocks, and perform fast settlements.
Interestingly, even if sidechains go terribly wrong, they won’t affect the base chain, allowing them to serve as experimental platforms for rolling out features that should command majority network consensus.
If users are comfortable with off-chain transactions, sidechains may be an essential step for efficient scaling. Mainchain nodes do not need to store all transactions of the sidechain. Alice can enter the sidechain with a single Bitcoin transaction, perform hundreds of sidechain coin transactions, and then exit. As far as the Bitcoin blockchain is concerned, she has only completed two operations: one in and one out.
Ethereum Plasma is similar, but with significant differences. Read What is Ethereum Plasma? for more details:
Payment channel introduction
What is a payment channel?
Payment channels play the same role as sidechains in scalability, but they are fundamentally different. Similar to sidechains, payment channels separate transactions from the main chain, preventing the blockchain from expanding indefinitely. However, unlike sidechains, they do not require a separate blockchain.
Payment channels support user transactions through smart contracts without publishing transactions to the blockchain. They operate using a software-enforced agreement between two participants.
How Payment Channels Work
In the popular Lightning Network model, two parties first deposit tokens into a jointly owned address. This is a multi-signature address, which requires two signatures to use the funds. Therefore, if Alice and Bob create such an address, funds can only be transferred with the consent of both parties.
Suppose both people deposit 10 bitcoins into the same address, and the balance of that address is 20 bitcoins. They can easily determine the initial balance, that is, Alice and Bob each have 10 bitcoins. If Alice needs to transfer a token to Bob, she can update the ledger to: Alice has 9 bitcoins and Bob has 11 bitcoins. They can update the balance without publishing the transaction to the blockchain.
Finally, after all transactions are completed, let's say Alice has 5 bitcoins and Bob has 15. They can create a transaction to send these balances to their respective addresses, sign it, and broadcast it on the chain.
Alice and Bob could have recorded dozens, hundreds, or even thousands of transactions in the ledger. But at the blockchain level, they only performed two on-chain operations: one initial funding transaction and one redistribution of the balance after the transaction was completed. Other than these two points, all other transactions are conducted off-chain, with no fees and almost instant transactions. Neither party needs to pay miner fees or wait for block confirmation.
Of course, the examples discussed above are based on the understanding and close cooperation between the two parties, which is not suitable for strangers. However, special mechanisms can also be used to punish fraud and allow unfamiliar parties to trade safely.
Payment Path
Payment channels are obviously more convenient and faster for both parties who frequently transact. This approach is also getting better day by day. The network of these channels can be continuously enriched and optimized, allowing Alice to pay recipients who are not directly connected. If Bob and Carol open a payment channel, Alice can pay Carol through this channel as long as there is enough capacity. She can first pay through Bob's payment channel, and Bob will transfer the funds to Carol's channel. If Carol is connected to another participant, Dan, the same operation can be performed.
Such a network structure eventually evolved into a distributed topology where everyone can connect to multiple peer nodes. There are many payment channels, and users can choose the most effective channel independently.
Summarize
In the previous section, we discussed two scalability solutions. Both allow transactions to be completed without adding burden to the base blockchain. Sidechains and payment channels are not mature yet, but they are increasingly being adopted by users who want to circumvent the shortcomings of base-layer transactions.
As users continue to join the network over time, it is essential to maintain decentralization. To achieve this goal, the growth of the blockchain capacity can be limited so that new nodes can be added at any time. Supporters of off-chain scalability solutions believe that as technology develops, the main chain will only serve high-value transactions in the future, or only be used to connect/disconnect side chains and open/close payment channels.
