A car and automotive enthusiast would stop everything they are doing to shed their wisdom about what makes a Cadillac truly special is its V8 engine. While the chassis, sound-system, navigation system topped with Android Auto or Apple Carplay and the hosiery alter the experience of driving but it is genuinely about the engine.
Something similar applies to Web3. While there ate NFTs as PFPs and gaming, DeFi protocols solving lending and prediction markets, communities driving unseen engagement and dialogue; it all boils down to the base layer, i.e., the chain itself. Suppose the chain possesses the chops to process a massive number of transactions currently being handled by various web2 systems, in record time and in a scalable fashion where interfaces, communication, and transfer of data are possible in a secure way. In that case, it is truly the only force required to red-pill even the hardest of the critics.
The perfect blockchain boasts three elements: Security, decentralization, and scalability. However, finding a balance between the three is complex and presents a problem called the blockchain trilemma. Scalability and decentralization are often held back by security, but security tends to be compromised by any shifts on a network that offer scalability.
This is the golden problem that all chains are trying to solve. In the quest to solve the trilemma, innovative ideas like sidechains, parachains and state channels are used to address it, but they are still experimental. We will try to shed some light on how these work and the projects that are implementing these ideas. Also, treat the following as a glossary where a particular chain can implement multiple solutions to solve specific issues and make processing more accessible and scalable.
Parachains can be best understood as assembly lines. Chains like Ethereum has just one assembly line, and thus, when it is asked to process too many things, the chain gets cluttered and slows down. The ecosystem noticed this anomaly, and then subsequently, newer projects started implementing the idea of deploying multiple assembly lines under the same roof. Every assembly line distributes work among themselves making it easier and quicker to process transactions.
A blockchain bridge is a connection that allows the transfer of tokens and/or arbitrary data from one chain to another. Both chains can have different protocols, rules and governance models, but the bridge provides a compatible way to interoperate securely on both sides.
For example, if someone wants to transfer their assets from Ethereum to Solana, they would use a bridge to send those assets across to the other chain. Here what happens is that the bridge sends an instruction to the Ethereum blockchain to lock or “freeze” the assets that need to be transferred to the other chain and also instructs the receiving chain (Solana in this case) to replicate those same assets on their blockchain under the technical standards that match the potency, attributes and values of the assets when they were on Ethereum.
So, an ERC20 token, when transferred through a bridge to Solana, will turn into SPL, which is its equivalent on this chain as accepted by the community. Also, there would be some loss in value as the gas fee is paid on both chains.
More popular than any decentralized blockchain bridge is a centralized initiative that enables Bitcoin (BTC) users to leverage the benefits of Ethereum: Wrapped Bitcoin (wBTC). Users deposit X amount of Bitcoin via partners called “merchants” into a wallet controlled by a trusted (centralized) custodian, institutional digital asset company BitGo, which stores the BTC securely and then mints wBTC tokens of equal value on Ethereum. Because all wBTC are backed 1:1 by BTC, the two tokens are roughly equivalent in value. Also, and most importantly, since wBTC is an ERC20 token, it, unlike Bitcoin, can be used as collateral in popular Ethereum dapps, such as Uniswap, Compound, Aave, and the Maker Protocol.
There are also sidechain bridges that connect the parent and child chain instead of connecting two different blockchains. Because the parent and child operate under different consensus rules, communication requires a bridge.
Bridges are also crucial because the foreseeable future, as per most experts, is a muti-chain, where every chain would excel in one cause, and thus interoperability becomes crucial.
One implicit downside of blockchain bridges is centralization. Users need to give up control of their coins if they wish to convert them to another crypto, essentially trusting it in the hands of someone else. There are also decentralized blockchain bridges, or ‘trustless bridges’, that intend to operate just like an actual blockchain with individual networks pitching in to validate transactions. However, the problem with decentralized bridges is that the service is freelance-based, and one might run into trouble of unavailability.
Top Blockchain Projects
Apart from Ethereum and Bitcoin, there are some 100+ projects that are trying to solve the same issues in a different fashion, where some chains might have a generalistic approach and some dedicated explicitly to solving for a particular asset class like NFTs or DAOs or on one aspect of the whole economy or the market like solving just for facilitating DeFi and Decentralized Exchanges.
Here are some of the top chains that have gathered a massive community and are building great products on top of them:
Solana is a crypto computing platform that aims to achieve high transaction speeds without sacrificing decentralization. It employs a bundle of novel approaches, including the “proof of history” mechanism.
Like Ethereum, Solana is a cryptocurrency and a flexible platform for running crypto apps — everything from Degenerate Apes to the Serum decentralized exchange (or DEX). Solana can process around 50,000 transactions per second — compared to 15 or less for Ethereum. Solana’s native cryptocurrency is SOL, used to pay transaction fees and to stake. It also gives holders the right to vote in future upgrades.
Unlike Ethereum’s consensus mechanism called proof of stake — in which network participants “stake” their crypto to get a chance to validate transactions and earn newly minted crypto and fees, Solana uses a combination of proof of stake and a new mechanism called “proof of history.”
In a PoS mechanism, all the computers in the network need to come to a consensus on certain facts — including when a transaction took place. At the same time, Proof of History is designed to keep the time between computers on a decentralized network without all the computers having to communicate about it and come to an agreement.
Tezos, another smart contract-capable blockchain used to issue new digital assets and create decentralized applications, or dapps. XTZ is the native cryptocurrency of Tezos. One of the first networks to use a proof-of-stake (PoS) consensus mechanism.
It also has unique governance features built-in: Participants who stake at least 8,000 tokens on the network receive voting rights, which allow them to have a say in its governance. Tezos is also known for its dapp security.
Polkadot is a protocol that connects blockchains — allowing value and data to be sent across previously incompatible networks (Bitcoin and Ethereum, for example). It’s also designed to be fast and scalable. Like Ethereum and Solana, Polkadot is both a currency and a decentralized protocol on top of which DApps can be built.
The Polkadot network includes a main blockchain called the “relay chain” and many user-created parallel chains (or “parachains”).
The Polkadot network can process more than 1,000 transactions per second, compared to about 7 for Bitcoin and 30 for Ethereum. As the network grows and more parachains are added, Polkadot should get even faster. It also has a connecting layer, or “bridge,” that allows value and data to be transferred between most blockchains — and can even be used to connect to non-blockchain databases.
Launched in 2020 by the Ava Labs team, Avalanche quickly ascended the cryptocurrency rankings with its TVL (Total Value Locked in the protocol) skyrocketing and is now worth $3 billion across Avalanche dapps.
Avalanche takes the whole parachain proposition one notch higher by implementing three chains under its hood. The reason behind this design choice is that each blockchain specializes in a task within the broader Avalanche ecosystem instead of having one chain do them all.
Exchange Chain (X-Chain) - The Exchange Chain (X-Chain) is the blockchain responsible for creating and transacting Avalanche assets. Transactions on the X-Chain generate fees paid in AVAX(Avalanche’s native currency).
Contract Chain (C-Chain) - Smart contracts are Avalanche’s key feature. The C-Chain runs smart contracts for the Avalanche platform and is compatible with EVM (Ethereum Virtual Machine). Being EVM compatible means anyone can deploy Ethereum smart contracts on Avalanche.
Platform Chain (P-Chain) - Avalanche’s P-Chain allows anyone to create an L1 or L2 blockchain. You can even go as far as creating a group of them. In Avalanche terms, these blockchains are called subnets, with the P-Chain being the default subnet common to all.
The P-Chain is what makes Avalanche truly special. It gives developers the power to create unlimited subnets, simply clones of the default blockchain. This makes the chain highly scalable as when one of the subnets is grossed with high traffic, and another subnet can be created, thus increasing the capacity of processing transactions.
Binance Smart Chain
Binance Smart Chain (BSC) is a blockchain that runs parallel to Binance’s premier blockchain Binance Chain (BC). It was launched almost one and a half years after the latter with the explicit purpose of introducing smart contract programmability that was not supported in BC.
Binance, which started as a Centralized Exchange(CEX), launched the Binance Chain blockchain in April 2019 to support its vision for decentralized trading. It jointly launched the Binance Decentralized Exchange (DEX) with the blockchain, designed for high transaction throughput.
However, BC is structurally limited, only allowing for decentralized trading. Thus, Binance Smart Chain (BSC) launched in September 2020, about a year and a half after its older sibling BC. It is a smart contract platform mimicking the functionality of Ethereum.
The important thing to note here is that BSC is a standalone chain, and both chains run independently. It aims to solve the issues that Binance Chain had. That being said, Binance made sure to design native cross-chain compatibility between the two blockchains. Tokens on the BSC network can now be easily swapped to other tokens by using the relatively ultra-fast Binance DEX on the Binance Chain.
Apart from these, there are chains like Flow by Dapper Labs that is solving for NFTs and Gaming and have developed platforms like NBA Topshots - NFT Marketplace in collaboration with NBA among many others, WAX which is also solving for NFTs, Cosmos which is working on the being the Internet of Chains, Filecoin and Arweave - solving for decentralized storage and so many others.
The Ethereum Bandwagon
While we at The Token Dispatch are not any chain maximalists, one thing the whole web3 community agrees is that the attention Ethereum has achieved over the last few years is unmatched. Sadly, this attention has also brought forward the problem of unscalability.
Now that it is possible to build products on top of the blockchain, more and more people will use them. To truly replace the current financial structure, a chain needs to ideally process more than 1.01 billion credit card transactions every day around the world, if not more. The cumulative number of credit card and non-credit card transactions would be eye-popping.
Thus, even with 300 million crypto users, which is nearly 3.7% of the global population, it has become quite painful and expensive to process transactions on Ethereum. Thus, to solve this, multiple technical initiatives are being considered to update the network and make it more scalable.
The update is dubbed Ethereum 2.0. It is still in the works as much experimentation, and technical aspects need to be considered. Also, the update would happen in a phased manner.
Until that happens, the community of developers have tried to work on several solutions bundled with complex maths and lines of code. Some of these solutions are:
Off-chain scaling solutions are meant to indirectly scale the primary layer one blockchain by adding more layers to process the transactions without using the actual core blockchain. Off-chain scaling uses the primary layer of blockchain as a trust and arbitration layer. Off-chain scaling is often referred to as Layer 2 scaling as it adds another layer on top of the main Ethereum layer. They are seen as the immediate resolution to solve the scalability issue.
“Sidechains” are separate blockchains that run parallel to Ethereum Mainnet and operate independently. In general, sidechains do not rely on the main blockchain’s security, and they have their consensus mechanism. Hence, they are believed to be less secure.
A State Channel is a solution that allows a group of participants to perform an unlimited number of private transactions off-chain. Off-chains means transactions or any activity that occur off a given blockchain network that may be later reported or batched together before being submitted to the main chain. Unlike conventional on-chain transactions, the state channel transactions are not made public. They are only visible to participants on the channel. Only the initial and final state of the transactions is recorded in the main blockchain.
State channels enable people to make several exchanges between themselves to maintain a blockchain ledger. Recording multiple small transfers is cumbersome on the blockchain because each transaction needs to be verified and confirmed by miners. This can slow down the type of fast-paced exchanges the state channel participants need.
However, this still has the same problem because the centre has to deposit funds to ensure the capital turnover rate. So this solution can only be used to apply for transfers/payments.
The main idea of Ethereum Plasma is to establish a framework of secondary chains that will communicate and interact as sparingly as possible with the main chain (in this case, the Ethereum blockchain). Such a framework is being designed to operate as a blockchain tree, which is hierarchically arranged so that numerous smaller chains can be created on top of the main one. These smaller chains are also referred to as Plasma chains or child chains.
Note that sidechains and Plasma chains are similar but not similar. The Plasma structure is built through smart contracts and Merkle trees(a tree-like structure to arrange data), enabling the creation of an unlimited number of child chains - which are, essentially, smaller copies of the parent Ethereum blockchain.
On top of each child chain, more chains can be created, which builds a tree-like structure.
Each Plasma child chain is a customizable smart contract designed to work singularly, serving different needs. This means that the chains can coexist and operate independently.
Therefore, if Plasma gets successfully developed and implemented into the Ethereum network, the main chain will be less congested. Each child chain would be designed to work in a distinct way towards specific goals - which are not necessarily related to the goals of the main chain. Consequently, child chains would alleviate the overall work of the main chain.
Rollups settle the transactions outside the main Ethereum network but post the transaction data back to the Ethereum network and still derive its security from the Ethereum protocol. Each rollup has its specific contracts deployed on the main Ethereum network. Rollups executes the transaction off the chain mainly on a rollup specific chain and then batch the transaction data, compresses it, and sends it to the main Ethereum chain; this reduces the load on the main Ethereum network of actually processing those transactions.
This helps in reducing the fees and blockchain adoption by increasing participation. Rollups also enable redeployment of all the existing Ethereum smart contracts to a rollup with little or no change. There are two types of rollups: Optimistic Rollups and ZK-rollups.
Optimistic rollups: As the name suggests at first, Optimistic rollups assume that the transaction data submitted to the Ethereum network is correct and valid. Whenever there is an invalid transaction, there is a dispute resolution. A party submits a batch of transaction data to Ethereum, and whenever someone detects a fraudulent transaction, they can offer fraud proof against that transaction. Here both the parties, the one submitting the transaction data batch and the one submitting the fraud-proof, have their ETH staked. This means that any misconduct from either party would result in the loss of their ETH. Whenever a fraud-proof is submitted, the suspicious transaction is executed again, this time on the main Ethereum network. To make sure the transaction is replayed with the exact state when it was originally performed on the rollup chain, a manager contract is created that replaces specific function calls with a state from the rollup.
ZK-rollups: ZK-rollups or Zero-Knowledge rollups, unlike Optimistic rollups, do not have any dispute resolution mechanism. It uses a clever piece of cryptography Zero-Knowledge proofs. In this model, every batch of transactions submitted to Ethereum includes a cryptographic proof called a SNARK ( Succinct Non-Interactive Argument of Knowledge ) verified by a contract deployed on the Ethereum main network. This contract maintains the state of all transfers on the rollups chain, and this state can be updated only with validity proof. This means that only the validity proof needs to be stored on the main Ethereum network instead of bulky transaction data, thus making zk-rollups quicker and cheaper comparatively.
What is Layer 2?
Layer 2 is a collective term for projects designed to help Ethereum scaling by using the above solutions to handle transactions off the main Ethereum chain (layer 1). Transaction processing is slowed when the network is accomodating the user experience for certain types of DApps, especially in DeFi and gaming. Furthermore, as the Ethereum network gets busier, gas prices increase as transaction senders aim to outbid each other. This can make using Ethereum very expensive.
These chains tend to work on these specific pain points to become a viable solution for the community to process their transactions with trust and security.
Top Layer 2 Protocols
Polygon (previously Matic)
Polygon, previously known as Matic, is an emerging platform for developing Ethereum-based blockchain networks and connecting them. It features all developers’ essential tools and components to create optimized Ethereum instances. The instances provide the complete standalone blockchain traits such as sovereignty and scalability. In addition, they also offer considerable improvements in flexibility for developers along with the security of Ethereum.
Polygon is slowly becoming one of the most popular Ethereum layer 2 solutions. The Polygon network is expanding exponentially, irrespective of the current decline in the market’s growth. In addition, Polygon has also collaborated with many significantly popular partners such as Umbrella Network, Kambria Open Innovation, Graphlink, and Mogul Productions, alongside many other prominent names.
Off-chain Labs have developed Arbitrum with features for close interoperability with Ethereum, thereby enabling Solidity developers for easier cross-compilation of their smart contracts. The three primary components of Arbitrum include validators, compiler, and the EthBridge.
The compiler helps compile an assortment of Solidity smart contracts into an executable file compatible with running on AVM or the Arbitrary Virtual Machine.
The validators are primarily responsible for the majority of the off-chain work alongside monitoring the state of the AVM.
EthBridge is a decentralized application deployed on the Ethereum main network. It serves as a connection between the Ethereum main network and Arbitrum.
Interestingly, Arbitrum does not have a native token and does not plan to launch one anytime soon. The project has quite a few notable entries in the list of partners, including Chainlink, Graph Protocol, OKEx, and many others.
Optimism is an Ethereum scaling solution that can improve the affordability of transactions. In addition, it can also ensure prolific improvements in transaction speed for Ethereum users. Developers could easily create Solidity smart contracts capable of running on Optimism, albeit with certain exceptions.
In addition, Optimism also allows interaction of off-chain codes such as UIs and wallets with layer 2 contracts on Optimism. One of the striking highlights of Optimism directly points out its collaboration with Synthetix. The platform has recently announced that it will allow users with SNX tokens to place their stakes in Optimism layer 2 solutions. Furthermore, Optimism has also engaged in partnerships with Rubicon and Etherscan.
There are several other Layer 2 projects like Cartesi, Loopring, ParaState, Immutable X, and each one uses its style of scaling solution. However, they are comparatively new and still awaiting mainstream attention.
Since we have been talking about community for so long, it is high time we realize that communities are the crux of web3, and the community’s support will decide the fate of these protocols. While technical and logistical issues have workarounds, communities do not.
This is why all the protocols have set up non-profit foundations, most of them registered in off-shore locations, to support and fund projects and developers that’ll help the ecosystem and foster user acquisition, transaction processing, new use cases, and in turn, increase their chances of sustainability. The Ethereum Foundation, Solana Foundation and Solana Ventures(venture capital arm), Web3 Foundation by Polkadot, Tezos Foundation, and many more have set up multi-million dollar grant funds to identify and support upcoming projects through grants, industry connections and technical know-how.
The protocols are also partnering with top projects with high TVL and thriving communities built on top of other chains to replicate the latter’s chain. This would help them get a proven model on board and use that reputation to acquire more users.
Bitcoin Missing Out
Even though Bitcoin was the first time most of the world came across cryptographic assets and blockchain, it has been a bit of a bummer for most developers in the space.
Concerning scripting, the Bitcoin blockchain is somewhat limited as it relies on a scripting language that is non-Turing-complete and thus does not support complex loops.
The decision to implement such a restricted scripting language, on the one hand, leads to lower vulnerability to external attacks on the Bitcoin blockchain, but on the other hand, limits the possibility to create smart contracts.
Still, as changes to the Bitcoin protocol are relatively rare and complicated, the platform is currently not the most attractive one for creating complex applications.
While there have been attempts to build protocols on top of bitcoin, they have not tasted much success. Also, BTC Maximalists would differ with this idea and argue that it serves the core purpose of replacing currency. It has not been digested well, as many aspects of the economy need to be placed on the blockchain before we go all in. Anyway, BTC value is still rising, and there is a vast chunk that finds crypto synonymous with BTC and thus confides in it.