Blockchain incompatibility has prompted the idea of Layer 3
Blockchain can be said to be one of the most over-hyped technologies of recent years. However, it suffers a whole lot of teething problems to say the least. After showing promise of being able to overhaul the top-down model of relationships, implementable decentralised solutions in the real world are still a long way off. They are either not fully decentralised, or poorly scalable due to low throughput, or lack of compatibility with other blockchains. Hence, there really is that no ecosystem is adopted en masse. In this piece, we will take a glance at the main pain-points of existing blockchains and the solutions which aspire to alleviate them.
Decentralization vs. scalability: a story of one or the other
The major disappointment is that you cannot achieve all the advantages of blockchain at once. You have to choose one or the other. The necessity of this choice is known as the DCS Theorem, which states you are allowed to implement only two options from the triangle of ‘decentralisation – consensus – scalability’.
Since one of the key features of blockchain is decentralization, every node keeps a full copy of the network status. As a consequence, the blockchain can process only a limited number of transactions. Therefore, a number of nodes capable of dealing with the load can be reduced to a bare minimum, and everything return to the same old centralization.
Without the two first qualities of the DCS Theorem – decentralisation and consensus – the system loses its original advantage and stops serving the purpose of true decentralisation and equality. The more you focus on these two goals, the more complicated it is to apply the system to global markets that require speed and scalability.
Although, the scalability issue has already been addressed by layer 2 solutions which became all the rage in 2018. This is not the main focus of our review, but let’s touch upon what they are all about. It is an off-chain superstructure on top of a base blockchain represented by state channels or side chains, which allow us to vary the mechanisms for achieving consensus between counterparties. The base layer is reserved for the most sensitive and security-demanding transactions and for anchoring data from sidechains.
The idea of a state channel reimagines the mechanisms for achieving consensus between counterparties – it happens locally on the network, not globally. To take advantage of state channels, you have to create a payment channel with a node that is connected to a larger network. The payment lines established between counterparties allow them to transact as many times as they want. The state of the performed transaction is transmitted to the underlying blockchain, hence the name ‘state channels’. Counterparties do not have to trust each other because their interaction is guided and executed in the form of a smart contract. You can open multiple state channels so that the blockchain is not limited in its scaling.
The best-known second layer implementations are Liquid and RSK sidechains for Bitcoin, Plasma for Ethereum, and also for projects like the Lightning Network, Raiden Network, and Celer Network. Their main point is increasing throughput, assuring flexibility supported by high security of storage and transfer value at the base level of the network.
If we turn to a particular implementation of layer 2 by the Lightning Network, the idea comes down to the capability of opening the payment channel between two users by including a special funding transaction in the underlying blockchain. None of the participants can willfully withdraw money, as both parties sign each other’s transactions.
Lack of interoperability
Another standalone, yet related problem, caused by separately developing technologies is the lack of interoperability which in practice means the impossibility of combining patchy blockchain ecosystems to freely exchange values.
There are a hefty number of incompatibilities in the world that weren’t eliminated at origin. There are different types of sockets, right- and left-hand traffic, or various railway gauge standards. Many of us have traveled by train at least once in your life, crossing the boundaries of different road standards. The difference in just a few millimeters in width between the rails causes a need to replace the wheels under each car or transfer passengers to another train. At the production level, incompatible standards lead to a situation in which the same train cannot be used on the lines of, for example, Spain and the rest of the EU. This requires huge investment in development and testing of individually customised technical nodes by manufacturers.
The same goes for blockchains which are all written in different languages and configured for different tasks. If they were interoperable, we would be enabled to transfer values quickly and not rely on centralized exchanges. But there is no law or agreement in place that would force developers to create a one-size-fits-all network.
None of the projects related to layer 2 address this problem, except Lighting Network’s plans to do it down the road. But is it even possible to solve the problem of interoperability at this level? “Insufficient interoperability among payment systems and blockchains is not a task of layer 2 solutions,” says Max Demyan, co-founder of the GEO Protocol project, which has focused on research in this area since 2015. Ensuring interoperability of separate ecosystems should take on a separate niche, namely, layer 3, he adds.
The project, headed by Max, embarked on advancing the concept of a trustline which resembles the Lightning Network and Raiden’s bidirectional channels. The idea is also based on the local consensus of only those users that are involved in a particular transaction, but is implemented in the form of mutual trust between them instead of multisig liquidity.
The system is fuelled by a network of users on different blockchains and digital payment platforms who trust one another to issue and settle IOUs (I owe yous). This means that one user can borrow from another who trusts him and then issue a token acknowledging the debt. Participants can create a large network of users who trust one another in the form of chains. This means that two users who do not trust each other can transact through a common intermediaries with which they both have a trusting relationship.
Another concept developed by the GEO Protocol is composite channels, which are a combination of trustlines with user-issued assets and classic state channels with cryptocurrency locked up in an on-chain multisig wallet. This combines scalability with a trustlessness of the base layer blockchain or multiple blockchains.
The features of layer 3 technologies allow to find a common language not only for blockchains, but also for decentralized cross-chain exchanges, payment systems, dApps and IoT-fuelled solutions. The whole point of layer 3 technologies that they are not obsessed with blockchains, but instead help them find connections with traditional financial systems, thereby speeding the adoption of decentralized technologies up. This allows to combine all the different value holding systems into a unified Internet of Value, with no boundaries for exchanging various types of assets: cryptocurrency, fiat money, or digital equivalents of virtually any goods and services.
The exchange of value is likely to be happen through decentralized solutions. However, obsession with the concept of blockchain and the commitment to decentralization in its pure form is hardly to be the right way to bring about adoption en masse. Existing blockchains and auxiliary tools that increase throughput are no longer enough to make it to the end user who would be ready to make purchases and money transfers through DLT.
It’s safe to say, the interoperability of private blockchains and their compatibility with exchanges and payment systems, both blockchain and server-based, will require new solutions from the developers of layer 2, 3 and beyond.
Guest article written by: Max Demianiuk