Blockchain’s Scaling Crises: Can Sidechains Be A Potential Solution?
As fast as technology moves, the impetus of technology within technology is even more rapid. Blockchains emerged on to the market over the last 10 years, with their adoption and growth really only peaking in the past four, and yet there is already scope for huge upgrades.
Blockchain has been heralded as potentially the biggest technological revolution since the internet. However, within blockchain there is already a perceived third edition; if Bitcoin was version 1.0, then Ethereum is 2.0. Now, the latest hot topic is cross-chain transfers the entire ecosystem of sidechains that is developing to form Blockchain 3.0.
“If Bitcoin was version 1.0, then Ethereum is 2.0. Now, the latest hot topic is cross-chain transfers the entire ecosystem of sidechains that is developing to form Blockchain 3.0”
As it stands today, blockchain interoperability - the ability to send and receive across different chains - is virtually non-existent. However, an atomic swap has been performed and the future is becoming clear on the horizon. Moving value across chains, without the need for a centralised third party, is something that could propel blockchain technology to a new level.
At the same time, the budding ecosystem of sidechains - comprised of Ethereum's scaling options such as state channels and Plasma, as well as, to an extent, Bitcoin’s Lightning Network - is creating conditions in which blockchains can scale and expand to be more functional in the not-too-distant future.
A cross-chain transfer falls within the realm of chain interoperability. This essentially means the ability for two blockchains to work and operate with one another, an important part of which is transfers across chains.
It is an area of theoretical discussion for now but, back in 2016, Ethereum Co-Founder Vitalik Buterin made an attempt to encompass its potential in a paper.
“Interoperable chains open up a world where moving assets from one platform to another,” he writes, “or payment-versus-payment and payment-versus-delivery schemes, or accessing information from one chain inside another – for example, ‘identity chains’ and payment systems may be a plausible link – becomes easy and even implementable by third parties without any additional effort required from the operators of the base blockchain protocols.
“So far, the notion of chain interoperability has seen much theory and little practice, primarily because a live example of successful chain interoperability requires not one but two already existing, stable and sufficiently powerful blockchains to build off, but this is slowly starting to change.”
“So far, the notion of chain interoperability has seen much theory and little practice”
Indeed, one major step in the development of chain interoperability is the case of the atomic swap between Litecoin and Decred that happened almost exactly a year after Buterin wrote his paper. Moreover, an atomic swap is something a little more special, as it does not require a third-party as Buterin mentions above.
An Atomic Swap
On September 19th, 2017, Decred and Litecoin completed the first-ever cross-chain atomic swap. This was an important step in the evolution of blockchain technology as it represents the ability to conduct trustless, cross-chain transactions without the need for third-party exchanges.
This is a significant step forward in the way in the development of blockchain and cryptocurrency. No longer is the market dominated by one major blockchain. Instead, there are multiple to choose from, and it needs to become possible to transfer assets from one chain to another in a decentralised, trustless manner. Currently, moving assets from one blockchain to another relies on trust between the two parties or, at the very least, trust in a third-party or escrow to mediate the transaction.
But what is an atomic swap, and why is it the basis for cross-chain transfers? Cross-chain transfers performed using atomic swaps put a decentralised and trustless spin on an ordinary transaction. Ordinary transactions require two transfers: first of the money and then of the goods. In an atomic swap, a single, dependent transfer swaps both values at once. This is done by making both sides of the trade dependent on each other.
The added benefit of an atomic swap is that it totally removes the need for exchanges, which have acted as honeypots for hackers. The danger of an exchange is that when you make a trade the exchange has custody of your coins, which makes it attractive for hackers to try and infiltrate. This is also why atomic swaps are known as non-custodial trading.
“The added benefit of an atomic swap is that it totally removes the need for exchanges, which have acted as honeypots for hackers”
“With atomic swaps, users retain the custody of their coins even when they are trading,” Ethan Heilman, Co-founder of Commonwealth Crypto, said in a presentation at Binary District’s ‘Off the Chain’ Master Workshop in Berlin last June. “There is zero counterparty risk. In our solution, we went with trusting the blockchain for making trades, since you are already trusting the blockchain for your cryptocurrencies anyway. This means there is no additional trust when you are already trusting the blockchain.
“If you look at something like ShapeShift, you can move coins from one cryptocurrency to another, so you have some Bitcoin, and you want some Litecoin, so you pay ShapeShift the Bitcoin and as soon as that payment goes through, you get your Litecoin. Before this trade is done, your Bitcoin is secure because you are holding those keys, but at the moment of trading, they could just not send you Litecoin.”
What Heilman is getting at is part of the theoretical decentralised future of blockchain and cryptocurrency. In order to perform a lot of the functions of cryptocurrency, one needs to start delving into centralised trusted platforms, which goes against a core tenet of blockchain technology. By using an atomic swap, making a trade is now back to being entirely trustless and decentralised as it becomes a function of the blockchain rather than a third-party custodian.
“By using an atomic swap, making a trade is now back to being entirely trustless and decentralised as it becomes a function of the blockchain rather than a third-party custodian”
Its Role in the Future
Blockchain’s evolution has hit a few plateaux in recent years. First, there was the major scaling issue, which caused something of a civil war between those who believed Bitcoin’s blockchain should remain at 1mb blocks and those who wanted to change the size. This led to the creation of Bitcoin Cash.
Furthermore, the scaling debate brought to the fore the current limitations of blockchains, especially when they start to reach critical mass. Even Ethereum hit problems when it was suddenly being used to run an application like CryptoKitties. These limitations have spawned scaling solutions from the Lightning Network to Sharding and Plasma, but the next step in the blockchain revolution will have a lot to do with cross-chain transfers.
“The scaling debate brought to the fore the current limitations of blockchains, especially when they start to reach critical mass. Even Ethereum hit problems when it was suddenly being used to run an application like CryptoKitties”
This is the belief of OK Blockchain Capital, a blockchain investment and financial institution partnered with cryptocurrency exchange OKEx. The researchpublished by the company touches on sidechain and cross-chain technologies, asserting that both of these would “play a key role” in the future development of blockchain, including its features and performance.
“Sidechain solutions such as the Lightning Network and ‘cross-chain’ solutions such as building multiple sub-chains for distributed consensus have created new ways to improve blockchain system performance. It is expected that better maintaining the concept of decentralisation will greatly improve blockchain-transaction performance,” the company wrote.
While atomic swaps and cross-chain solutions are still very much in their infancy, sidechain solutions are further along in their evolution. Cross-chain transfers will add another string to blockchain’s bow and will be necessary further down the line, but sidechains are a solution that will take blockchains to the next level, primed for cross-chain solutions.
Ethereum is already delving into sidechain solutions to help with its own scaling issues with the use of state channels, which have similar aims to the Lightning Network. Then there is Plasma, which allows for the creation of what are known as child blockchains, which are attached to the main blockchain.
These child chains have the ability to spawn further chains, and those chains even more, and so on. As a result, the mesh of child blockchains can undertake many complex operations that encompass thousands of users via entire applications.
“The mesh of child blockchains can undertake many complex operations that encompass thousands of users via entire applications”
So, sidechain solutions are being explored to help with the ongoing scalability issues. With their ability to open up different channels for certain applications and transfers to happen, though, getting cross-chain transfers right is vital in achieving connectivity between chains.
Pushing the Cross-Chain Envelope
While Litecoin and Decred have pulled off an atomic swap and broken ground in the movement towards cross-chain transfers, there are other companies who are in the throes of pushing the envelope still further.
A blockchain company called Fusion is looking into providing cross-chain and cross-organisational solutions. In other words, it aims to create a way to transfer value between assets, whether centralised (stocks, bonds and other traditional financial assets) or decentralised (blockchain tokens and cryptocurrencies).
WanChain is another enterprise aimed mostly at the financial world. It utilises a distributed ledger that records every cross-chain and intra-chain transaction, keeping an immutable financial record of the operations between chains.
But still, even within these sectors, their scope is limited. While WanChain and Fusion are financial in nature, the likes of Polkadot are trying to keep their aims more generalised. Its solution is the introduction of what it calls ‘parachains’, which are simpler forms of blockchain that attach to the security provided by a ‘relay chain’, rather than providing their own security protocols.
“[Polkadot’s] solution is the introduction of what it calls ‘parachains’, which are simpler forms of blockchain that attach to the security provided by a ‘relay chain’, rather than providing their own security protocols”
So, there are companies trying to expand the possibility of cross-chain transactions. However, the end goal of the process being simple and all-encompassing is a long way off as they test the waters in different sectors, and with different solutions.
Not Yet at its Peak
It would be easy to get carried away with blockchain technology and view it as the talisman of a new technological revolution, but the truth of the matter is that it has a long way to go before it will even find its feet. As time goes on, it is gathering more difficulties and issues that it needs to solve and encompass to be viable. It is also an interesting technology in that it is decentralised and open source, so decisions as to its future are not easily made and executed.
Sidechains are an important step in the right direction for dealing with scaling. Once that has been overcome and connectivity starts to become a primary bone of contention, no doubt cross-chain transfers will make their splash in the blockchain space.
Though decades apart, blockchain’s development has been broadly similar to that of the internet, only with added (internet-driven) hype. In the 1960s and 70s, the notion of building a network of computers had taken off, with different projects springing up with exponential regularity much in the same way we have seen with blockchain. The projects multiplied but there was, for a long time, no coherent solution to making them all work together.
Blockchain faces a similar conundrum. There are countless solutions to issues like scaling and privacy - though some would argue that only a handful are truly viable - and there is the talent and technology there to solve both. The problem is that no one solution is enough. Cross-chain transfers are part of the bigger picture, the ability to transfer between solutions to create a functioning blockchain ecosystem. If blockchain is to make even a fraction of the splash made by the internet, it will need to find a way to emulate the latter’s pulling together of disparate parts and creation of a coherent ecosystem.
Illustrations by Kseniya Forbender
To contact the editor responsible for this story:
Margarita Khartanovich at [email protected]
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