Off-chain scalability solutions on the blockchain: what are they? We recently talked about what blockchain scalability means: the capacity and speed of transaction processing that each particular protocol has and why this is currently a challenge. Let’s revisit this concept and analyze what on-chain transactions are. Although Bitcoin is the largest cryptocurrency by market capitalization, the performance of its transactions is still a matter of debate. As it is well known, an average of 7 transactions per second is not a scalability standard.
On-chain transactions Off-chain scalability solutions on the blockchain
On-chain cryptocurrency transactions (commonly called on-chain transactions) are those that occur within the blockchain itself – that is, in its records – and remain dependent on its state for their validity. All of these occur and are considered valid only when the blockchain is modified to reflect these transactions in the public ledger records. As we discussed in our scalability article, once a transaction obtains sufficient confirmations from network participants or network consensus is obtained, it becomes irreversible (hence the concept of immutability).
On-chain transactions are supposed to take place in real time in order to keep blockchain transactions secure, verifiable, transparent and instantaneous. However, in reality this usually does not happen, and on-chain transactions themselves have some disadvantages. On-chain transactions do not usually happen instantaneously, as they take some time to accumulate sufficient verifications and authentications from network participants before confirming a transaction. For example, if the volume of transactions is high, a limited number of miners/nodes will take a certain amount of time to confirm a transaction causing all parties involved to wait longer.
Vitalik Buterin, the creator of Ethereum, was the one who coined the concept of the “Scalability Trilemma” to describe the challenge that blockchains must face. This holds that protocols must reach a compromise between scalability, security and decentralization. These properties somewhat clash with each other, so by focusing too much on two of them, the third will perform poorly. This is why many believe that scalability should be achieved off-chain, while security and decentralization should be maximized within the blockchain itself.
What are off-chain scalability solutions on the blockchain?
When we talk about off-chain or off-chain transactions, we refer to approaches that allow the execution of transactions without overloading the blockchain. Protocols that connect to the blockchain and allow users to send and receive funds, without the transactions appearing on the main chain. Sidechains and payment channels come into play in this scenario.
What is a sidechain?
A sidechain is an alternative chain that is used to improve the performance of an established blockchain. The new blockchain can be connected and interact with the existing blockchain. The new chain contains completely different programming, blocks, nodes, validation mechanisms and features, but is still perfectly compatible with the chain it joins. They are not subject to the same rules, in fact they don’t even need to use Proof of Work to function. They can rely on a single validator, use any consensus mechanism, or adjust all sorts of parameters. You can add updates that don’t exist on the main chain, produce larger blocks and even have errors without affecting the underlying chain. This allows sidechains to be used as platforms for experimentation and to deploy features that would otherwise require the consensus of the majority of the network.
Thanks to this, both chains can communicate and complement each other’s capabilities. Sidechains seek to solve the saturation problems that affect many blockchains. To achieve this, they allow the original features and specifications of these projects to be extended quickly and relatively easily.
How do sidechains work?
The operation of a sidechain is far from simple. It is a great challenge that has taken many years of technical development. But roughly speaking, this is how it works:
First, cryptocurrencies are sent to a specific address. Once there, the funds are frozen and no one can handle them. The only way to access these funds is to prove that the cryptocurrencies are not being used elsewhere. Once it is confirmed that such funds are not being used elsewhere, a notification is sent to the sidechain. The sidechain will then automatically create the exact same number of cryptocurrency assets that were sent, using the token managed by that sidechain. Control of these tokens will be completely yours. From that point on, you will be able to exchange and transfer these tokens to make use of the potential of that sidechain. Provided users are happy with the tradeoffs, sidechains could be an integral step toward effective scaling.
Having looked at sidechains, we can now move on to payment channels.
What are payment channels?
Payment channels serve the same purpose as sidechains to meet the need for scalability, but they are quite different. Like sidechains, they push transactions off the main chain to avoid transaction quantum drawbacks. Unlike sidechains, they do not require a separate blockchain to function.
A payment channel uses a smart contract to allow users to make transactions but without publishing them on the blockchain. So we can say that it is a means of transaction outside the blockchain, where two people commit funds in one direction and pay each other by issuing payment commitments signed by the parties, avoiding having to wait for confirmations from the underlying blockchain.
How do payment channels work?
In models such as the popular Lightning Network, two parties would first deposit coins into an address they jointly own. This is a multisignature address, which requires two signatures to spend the funds. It requires both parties to cooperate, which is not an ideal situation for outsiders. However, mechanisms and tools can be used to punish any attempt to cheat, so that the parties can safely interact with each other even if there is no trust involved.
While the Bitcoin blockchain has great features around security, decentralization and immutability, scalability is not its strongest point. People cannot wait too long for transactions that should be fast and efficient, which is why alternatives were sought to provide a solution to this scalability problem. As a result of this problem, the two approaches that we have presented and analyzed a little more in depth in this article have arisen. Both sidechains and payment channel technology are not yet fully mature, but users are increasingly taking advantage of them. We believe that in the near future these protocols will be further explored and updated with innovative solutions within the framework of scalability.