Greetings to the ‘Layer 2’ era.
We are going to dive into the new phase of blockchain development wherein, big strides of scalability, interoperability and functionality are promised by the lightning network and other programming solutions that operate “on peak” of existing blockchains.
There is still a lot of unfinished work that has to be done. The early technology is a bit buggy, new security and trust solutions are to be looked upon when computing activity in individual transactions or smart contracts are taken “off – chain.”
But in reducing the heavy, multi-party computation that blockchains carry while ensuring that transaction histories are at some point anchored by “on-chain” consensus algorithms, there’s something of a best-of-both-worlds promise in these ideas.
“Computation is moved off-chain, either to enable privacy or to save computing resources,” Neha Narula, director of the MIT Media Lab’s Digital Currency Initiative, defines the feature of Layer 2.
“The script of the program is implemented by the two or more computers involved in the transaction.” Rather than having the script of a particular program executed by every computer in the blockchain network.
Neha added, “you get similar security protections as with on-chain transactions because the blockchain acts as the anchor of trust.”
Can anyone guess where all this goes? This is what makes an open source, flexible platforms and exciting as they offer the building blocks through which unexpected applications can be created.
In the 1990s, the development of the World Wide Web offered a useful source of contrast and comparison, when a similar, second layer solution transformed the Internet into a ubiquitous global phenomenon, rather than being a clunky network of mostly academic users.
We believe, we can expect a sudden innovation and development.
BACK IN TIME
Back in 1989, implementation of Tim Berners-Lee’s Hypertext Transfer Protocol (HTTP) on top of the base-layer Transmission Control and Internet protocols (TCP/IP) made way for Marc Andreessen’s Mosaic Netscape browser in 1994.
This gave a push to a host of web-based applications, which resulted in all the online services that now form part of everyday life.
In respect to blockchain industry, the sequencing will be different. For example, We already had our version of the late-nineties dot.com bubble, with last year’s ICO mania coming before the enabling Layer 2 technologies were in place.
Accelerating towards the adoption of Layer 2 development, hopefully, quite a good amount of token offerings will find its way into Layer 2 development.
There is intense competition when it comes to Layer 2 blockchain system compared to HTTP which was universally adopted as an almost immediate standard.
Actually, the lightning payment channels were originally created for bitcoin transactions, but it has certain smart contract capability and also supports interoperability. This could lift it up against alternative “state channel” Layer 2 solutions for ethereum, as well as with projects aiming to enable cross-chain transactions.
There are various other lightweight off-chain ways to expand transactional capacity, which is observed at the L2 Summit hosted recently by MIT DCI and Fidelity Labs.
AT THE PEAK
Currently, there are more 2000 nodes on the Lighting Network, maintaining more than 7000 channels. The journey to be a ubiquitous global network is quite far, but the community that has been growing with time provides a good foundation for experimentation.
Tadge Dryja, a co-author of the original Lightning white paper and now also at the DCI, has developed a unique form of privacy-protecting smart contracts, gives a great potential for development.
Layer 2 projects developed around Ethereum are generating interest. A buzz was generated at Event Horizon conference on blockchain energy in Berlin last month through the presentation on the ability of Polkadot and Slock and made the clients to think about developing off-chain, device-to-device transactions.
Ripple teaming up with Hyperledger consortium, the corporate engineers will have opportunities to develop enterprise uses for the startup’s Interledger protocol.
In this ecosystem, we will get to see a lot of competition amongst the well-established corporates against the Layer 2 startups such as Lightning Labs, Blockstream, Ripple and Parity and hundreds of independent coders around the world.
Standards will rise, creating winners, with consortia like the World Wide Web Consortium, better known as W3C, emerging to shepherd that process.
Lightning payment channels direct to the type of low-fee, fast-paced payments that bitcoin had promised earlier but couldn’t bring into action. In theory, this would take away business from banks, credit card companies, and money transmitters.
There’s no guarantee that regular Joe will get over the uneasiness towards cryptocurrencies – not without as-yet-unavailable solutions for price volatility.
There are queries about how regulators will manage with a system that would make transactions very hard for them to track. It’s still not clear that these off-chain solutions will achieve the kind of scale necessary without the emergence of powerful corporate interests.
One more issue is who will be the winners and losers in the crypto community. Might Layer 2 solutions deny miners the fees they need to continue securing the underlying blockchain?
The lessons from Wall Street in the late 1990s are here which might also be instructive. Some investment banks worried about the hit to revenue as web-based e-trading slashed brokerage fees. In reality, online technology expanded the pie for stock market trading, benefiting incumbent players even as their per-trade margins shrank. It was an example of what’s known as the Jevons Paradox.