From on-chain to off-chain: state channels and roll-ups

Author: Bill Buchanan, Source: Medium, Compiled by: Shaw Golden Finance

Soon, we need to realize that we are running a traditional financial world and need to build a more trustworthy digital infrastructure. In fact, we need to change not only the financial field, but also any field that requires high trust, security, and distribution. To do this, we can adopt a Layer 1 blockchain approach like Ethereum, but it has exposed scalability issues, and its main ledger and computing infrastructure cannot handle more than 15 to 30 transactions per second. However, new methods are being adopted today to reduce the burden on Ethereum-while still maintaining its credibility and distribution. These methods include Layer 1 implementations for sharing, and the transition to proof of stake (PoS). However, the most noteworthy progress has occurred in Layer 2 methods, which are built on the core Ethereum network (mainnet).

Layer 2: State Channels

State channels were first implemented in the Bitcoin Lightning Network and later expanded on Ethereum. In this way, we basically have two records on the mainnet ledger where the parties involved must commit some funds that may or may not be used. For example, let's say Bob wants to create a side channel to pay a client and commits to pay 10 ETH. He will then create a channel contract. The committed ETH will be locked for the life of the channel and cannot be spent. Bob can give Alice 2 ETH and Carol 3 ETH. Once he is done, he will submit the completed transaction, Bob will get back 5 ETH, Alice and Carol will get 2 ETH and 3 ETH respectively. In the end, Bob only needs to publish the summary data and only needs to pay the transaction fee for the two commitments on the mainnet ledger. The implementation of state channels is provided by Polygon, which achieves full EVM compatibility and low transaction fees. The following is an example:

Layer 2: Roll-ups

Optimistic Roll-ups

These mechanisms process transactions off-chain and assume that they are valid (essentially a “trust and verify” approach). They only take up computing resources on the mainnet when a transaction is disputed. Therefore, there is a delay of a “challenge period” before the transaction is actually confirmed to the mainnet.

In Arbitrum, fraud observers analyze transactions, and if fraudulent transactions are found, the observers publish fraud proofs to the mainnet. In effect, Arbitrum can identify the lines of code associated with the fraud analysis and then publish them to the mainnet. The mainnet can then adjudicate the fraud proof and decide whether to execute the desired code. Arbitrum has a seven-day withdrawal period.

Optimism also uses an off-chain approach, combined with Optimism Roll-up, and assumes that the transaction is valid. It uses observers (or verifiers) to determine whether there are fraudulent transactions. Once such transactions are found, observers can submit fraud proofs and the corresponding transactions will be revoked. Observers will be rewarded for discovering fraudulent transactions. In general, the questioning period is about seven days. If the fraud proof is true, the relevant transactions will be rolled back.

Zero-Knowledge Roll-ups (zk-Rollups)

These technologies move computation and state storage off-chain in a trustless manner. Once the state is updated back to the mainnet, only minimal updates are required to complete the state change and its associated proofs. Since we have the proofs in a compressed format, the updated transactions can be quickly verified while ensuring the privacy of the transactions. With this technology, unlike Optimistic Rollups which take days to commit, with zk-Rollups (based on zkSnarks) we can verify the proof in just about an hour. This ensures that there are no double spends and that all transactions are solvent. ZKsync is an example.

With zk-Rollups, the validity of the transaction is cryptographically proven and connected to the mainnet. Therefore, it will be extremely difficult to conduct fraudulent transactions. With Optimistic Rollups, due to the lack of cryptographic proof, there is a delay before the commitment is returned to the mainnet, which allows fraudulent transactions to be detected.

Sidechain

This is an independent sidechain, which is an independent blockchain bridged to the mainnet. Unlike the roll-up method, updated transactions can be echoed back to the mainnet when needed. In general, they have their own blockchain and consensus mechanism, such as Proof of Authority (PoA). Polygon is an example of a sidechain infrastructure. The overall weakness of sidechains is that their security model may be different from the Ethereum mainnet.

Conclusion

In my opinion, using zero-knowledge proofs in offline chains is the best solution because it allows for quick verification of transactions on the main chain and protects the privacy of both parties to the transaction. We can also use selective disclosure in zero-knowledge proofs, which is useful when revealing important information, such as whether a person has access to a resource.

For Optimistic Rollups, we assume that transactions are valid unless there is proof to the contrary, and require a challenge period during which transactions can be questioned before finalization. With zk-Rollups, our transactions are valid because there are associated proofs and they are quickly submitted to the mainnet. Unfortunately, zk-Rollups require a deep understanding of cryptography and blockchain, which may slow down the development process.

Obviously, Ethereum is not the only option, and Polygon, Solana, Cardano, and Polkadot offer more scalable alternatives than Ethereum. However, we love the blockchain that brought us smart contracts and the Ethereum Virtual Machine (EVM), and many people hope that it can overcome the scalability issues while maintaining the same level of decentralization and security.