‘Layer 2’ Blockchain Tech Is a good Bigger Deal Than you think that
Michael J. Casey is chairman of CoinDesk’s planning board and a senior advisor of blockchain research at MIT’s Digital Currency Initiative.
The following article originally appeared in CoinDesk Weekly, a custom-curated newsletter delivered every Sunday exclusively to our subscribers.
casey, behavior therapy
Welcome to the “Layer 2” era.
We are now entering an exciting new phase of blockchain development during which the lightning network and other programming solutions that operate “on top” of existing blockchains promise big strides in scalability, interoperability and functionality.
There is still much work to be done. the first tech is buggy, and new security and trust solutions must be found out when much of the computing activity in individual transactions or smart contracts is taken “off chain.”
But in mitigating 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.
As Neha Narula, director of the MIT Media Lab’s Digital Currency Initiative (where I work) describes it, the defining feature of Layer 2 is that “computation is moved off-chain, either to enable privacy or to save lots of computing resources.”
Rather than having the script of a specific program executed by every computer within the blockchain network, it “is implemented just by the 2 or more computers involved within the transaction.”
And yet, she said, “you get similar security protections like on-chain transactions because the blockchain acts because the anchor of trust.”
Where this all goes is anyone’s guess. That’s what makes open-source, extensible platforms exciting: they supply the building blocks upon which unimaginable new applications are often developed.
We’re not entirely driving blind, however. the event of the planet Wide Web within the 1990s offers a useful source of contrast and comparison, when an identical , second layer solution transformed the web from being a clunky network of mostly academic users into a ubiquitous global phenomenon.
Similarly to then, I believe, we will expect an avalanche of innovation and development.
Stepping back, the 1989 implementation of Tim Berners-Lee’s Hypertext Transfer Protocol (HTTP) on top of the base-layer Transmission Control and Internet protocols (TCP/IP) paved the way for Marc Andreessen’s Mosaic Netscape browser in 1994.
That then gave rise to a number of web-based applications, which ultimately fostered all the web services that now form a part of lifestyle .
In some respects, the sequencing are going to be different for the blockchain industry. We may have already got had our version of the late-nineties dot.com bubble, for instance , with last year’s ICO mania coming before the enabling Layer 2 technologies were in situ .
Still, an honest amount of the billions raised in those token offerings will likely find its way into Layer 2 development, hopefully accelerating their march toward wider adoption.
Also, whereas HTTP was universally adopted as an almost immediate standard, there’s an excellent deal of competition in Layer 2 blockchain solutions.
Lightning’s payment channels were originally designed for bitcoin transactions, but it supports interoperability and has certain smart contract capability.
That could put it up against alternative “state channel” Layer 2 solutions for ethereum (Plasma, Raiden) also like projects getting to enable cross-chain transactions (Polkadot, Cosmos, Interledger).
And, as seen at the L2 Summit hosted recently by MIT DCI and Fidelity Labs, there are many other lightweight off-chain ways to expand transactional capacity.
For example, developers at the startup Abra et al. are using established, decentralized blockchains like bitcoin and ethereum to settle futures contracts that are denominated in several currencies or tokens.
Already quite 2,000 nodes are on the Lightning Network, managing quite 7,000 channels. It’s an extended way from being a ubiquitous global network, but that growing community provides an excellent foundation for experimentation.
Now that a singular sort of privacy-protecting smart contracts has been developed by Tadge Dryja, a co-author of the first Lightning white book and now also at the DCI, there’s a good greater potential for development.
Layer 2 projects developed around ethereum also are generating interest. At the Event Horizon conference on blockchain energy in Berlin last month, much buzz was generated by presentations on the capacity of Polkadot and Slock.It’s Incubed client to enable off-chain, device-to-device transactions.
Meanwhile, with Ripple joining the Hyperledger consortium, corporate engineers will have opportunities to develop enterprise uses for the startup’s Interledger protocol.
In this environment, we'll see a competitive dance pit the interests of established corporates against Layer 2 startups like Lightning Labs, Blockstream, Ripple and Parity, also as potentially many independent coders round the world.
Ultimately, standards will arise, creating winners, with consortia just like the World Wide Web Consortium, better referred to as W3C, emerging to shepherd that process.
And what of the economic fallout from all this? If the nineties are a lesson, we will expect that, eventually, many legacy industries might be disrupted.
Lightning’s payment channels point to the type of low-fee, fast-paced payments that bitcoin early promised but did not deliver. that might , in theory, take business faraway from banks, mastercard companies and money transmitters.
Still, there’s no guarantee regular Joes will recover from their apprehension toward cryptocurrencies – not without as-yet-unavailable solutions for price volatility, for instance .
There also are questions on how regulators will affect a system that would make transactions very hard for them to trace . Finally, it’s still not clear that these off-chain solutions will achieve the type of scale necessary without the emergence of powerful corporate interests.
Will such participants impose unwieldy costs on the system or just provide much-needed liquidity? It’s too early to mention .
Another question is who are going to be the winners and losers within the crypto community. Might Layer 2 solutions deny miners the fees they have to continue securing the underlying blockchain? That was the subject of a recent Twitter exchange between Ryan Selkis and Jameson Lopp.
Here, the teachings from Wall Street within the late 1990s may additionally be instructive. Some investment banks worried about the hit to revenue as web-based e-trading slashed brokerage fees. actually , online technology expanded the pie for stock exchange trading, benefiting incumbent players whilst their per-trade margins shrank. it had been an example of what’s referred to as the Jevons Paradox.
History doesn’t always repeat, of course. Miners may indeed be hurt by activity going off chain. But it shouldn’t be our job to stress about them intrinsically .
The goal here, as clearly defined within the Segwit debate that ultimately resulted in lightning’s implementation on the bitcoin main-net, is for optimal decentralization and maximum security.
True innovation, by definition, is disruptive. So buckle up.