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VeradiVerdict - What Does Layer 0/BDN For Scalability Look Like? - Issue #38

Hi, I am Paul Veradittakit, a Partner at Pantera Capital, one of the oldest and largest institutional
May 21 · Issue #38 · View online
Hi, I am Paul Veradittakit, a Partner at Pantera Capital, one of the oldest and largest institutional investors focused on investing into blockchain companies and cryptocurrencies. I focus on early investments and want to share my thoughts and what’s going on in the industry in this weekly newsletter.
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Pantera invested in BloXroute with top investors such as Metastable, Flybridge, Coinbase Ventures, and others. Below, you can read about why the project is so exciting!
• Scalability is a huge issue for blockchain ecosystems, because the amount of information/transactions that can be put through a blockchain is severely limited by the size and frequency of blocks. With poor block sizes and frequency, transaction fees are enormous and transactions take too long to process to power Dapps and other blockchain innovations.
• The most common solution right now is Layer 2 architectures, which perform transactions “off-chain”, and commit them to the blockchain only periodically. This allows transactions to run faster, but then just sends the information to the blockchain at a later time. The most popular of these is the Lightning Network.
• The two main issues with layer 2 solutions are that they too face the scalability bottleneck, as they also require high volume transactions “on-chain”, and more importantly, they introduce significant new complexities that have not yet been resolved.
• bloXroute presents a “layer 0” solution––a networking infrastructure that runs underneath the blockchain to help propagate information in a way that fundamentally increases the volume of transactions blockchains process, using larger and more frequent blocks.
• bloXroute’s solution is also provably-neutral, protocol-preserving, and completely collaborative meaning that developers can use both layer 2 and layer 0 solutions in their innovation.
• bloXroute presents one of the most promising architectures to solve the scalability problem; it will fundamentally increase the number of transactions that are recorded in the blockchain, reaping huge benefits for miners and developers that depend on the volume of blockchain transactions.

The “Inescapable” Scalability Problem
The fundamental architecture of blockchain relies on a series of connected blocks, each of which contains information and interacts with other adjacent blocks in the networks to carry out transactions, preserve history, and propagate information throughout the network. 

The fundamental problem with this infrastructure is that these blocks are severely limited in size and frequency, which means that they can only process so much information and so many transactions in a given time period. The low number of blocks and the small size of these blocks means that the total amount of information that can be processed on a blockchain network at any given time is limited, which results in huge problems as developers try to scale their networks upwards to millions of nodes and users.

The scalability issue has created huge inefficiencies in blockchain ecosystems––namely, transaction times and transaction fees. In large networks like Ethereum, transaction times are notoriously slow because of the limited capacity of the network to process the high volume of transactions and information running through it; essentially, every new transaction has to “wait its turn” before it can be properly recorded on the blockchain. This has inspired networks to impose transaction fees to charge users for running transactions on their networks; such fees help limit the total number of transactions fed into a network at any given time, but present huge roadblocks for developers that rely on the network for their entire infrastructure. 

Altogether, the current baseline blockchain is too slow and too costly for most developers to capitalize on its architectural benefits.

How do people get around this?
There are quite a few ways that people have proposed getting around this scalability bottleneck: Schorr signatures to improve cryptographic processing, merkelized abstract syntax trees to reduce the computational size of smart contracts, increasing block size (with or without Segregated Witness), to name a few. But by far, the most common approach to the scalability problem is “Layer 2” solutions.

Layer 2 solutions essentially operate by running an architecture on top of the blockchain’s base layer to process transactions much faster than the vanilla blockchain architecture could. It does this by using smart networks and multi-party payment channels that link transactions together and allow them to go into effect without actually being recorded on the blockchain immediately; it instead caches the transaction information and initiates the process to propagate the transaction to the blockchain, which means that the transaction will occur and then be recorded on the blockchain later. This aims to preserve the security and underlying infrastructure of the blockchain that gives it its privacy value, but also helps improve transaction speeds which is a huge win for developers.

The most popular layer 2 solution out there is called the “Lightning Network”––you can check out a review of that here

So, what’s the lingering issue?
The persisting problem is that though Lightning offers considerably faster transactions at lower fees, its underlying architecture still relies on the slow ways that information is propagated through the blockchain, which means that it too faces a scalability bottleneck. Lightning infrequently records user transactions on the blockchain, so it still needs to use blocks as they were used before, which have their known problems with size and frequency of creation. Lightning also introduces new complexities, such as finding a route of payment-channels to facilitate a payment, the requirement to be online to receive payments, and the need to open and close payments channels. Thus, Lightning’s speed and ability to take on new transactions is still limited by the speed of the baseline blockchain. Essentially, it’s accelerating a slow process, which is an improvement, but still creates somewhat of a slow process.

What’s bloXroute then?
bloXroute is the next big advancement in this field of blockchain scalability. It’s essentially a “layer 0” solution that runs underneath the blockchain (considered to be layer 1) to improve speeds and decrease fees.

bloXroute uses a blockchain distribution network (BDN), which is basically a network of fast relay nodes that can disseminate blocks to any given blockchain, and is currently being used underneath the Bitcoin, BCH, and Ethereum mainnets. At a very high level, what the BDN does is enable the creation of more blocks in a very fast, efficient, and scalable way, which means more transactions can propagate through the network at considerably faster speeds.

How does the BDN do this?

There’s a lot of complicated networking and security protocols that go into the operation of the BDN, but it relies on:
1. Fast relay servers. This basically means that information is being broadcasted to the entire network, instead of the slow P2P gossip which requires many slow “hops” until all participants learn of a new blocks.
2. Cut-through Routing (“streaming”). Previously, blockchain required the entire block to be received before being sent to other nodes. The BDN foregoes that and streams the information to all nodes as soon as a block’s first data packet arrives. This improves transaction speeds by ~10-100x, significantly more than any Layer 2 solutions were shown to perform thus far.
3.The BDN compresses block by a factor of 100x, allowing much larger blocks to be broadcasted at the speed of small blocks.
4. Optimized Topology. Essentially, when propagating blocks, the BDN finds ways to optimize the connectivity of the network to create a solution that makes it very easy to send transactions through a series of blocks.

Most importantly, BDN does all of this without actually interfering with the way that the blockchain operates. Information is still propagated through blocks and their connections; the only difference is the way that blocks are created and the rate at which they are created. BDN helps solve the scalability bottleneck by addressing some of the inherent problems in the architecture of the blockchain system. The benefit of this is that the fundamental way that information is processed on blockchain networks is improved, but all the benefits and nuances of the blockchain network is preserved. BDN can work with any consensus protocol and does not interfere with the neutrality of the blockchain either, meaning there is no bias towards or against BDN-powered blocks. Additionally, developers can still run layer 2 solutions on top to increase speeds further.

What’s the biggest benefit?
BDN allows more transactions to run on the blockchain at any time, which means that there’s way more information being put through the blockchain. This has benefits on two fronts:

First, developers. Lots of developers use blockchain and smart contracts to power the underlying architecture of their apps, whether it be a decentralized application or a smart-contract-based protocol for arbitrage. This was previously limited by poor transaction speeds; no developer wants their app users to have to wait for servers to fulfill requests and for transactions to be processed. With BloXroute, developers can now run their transactions at the desired rate and build their blockchain innovations.

Second, miners. Miners are a key group in the blockchain ecosystem and one of the biggest reasons for the consistent growth of the industry. BloXroute provides more returns to miners because inherently, more transactions are running through the network meaning that there’s just more to mine, period. This gives miners way more revenue from the volume of transactions and transaction fees.

What’s the deal with BLXR?
BLXR is bloXroute’s security token. It is not used to utilize bloXroute, but it helps quantify the value of the protocol and creates an incentive for people to join the bloXroute ecosystem. All the revenues collected from bloXroute opt-in services for transactions running on its infrastructure will be distributed to holders of the BLXR token. This helps it attract more people to the network, and the neutral nature of bloXroute and its preservation of the blockchain infrastructure means that it capitalizes on collaboration in the blockchain ecosystem as opposed to competition.

Final thoughts
Scalability has been a hot topic in blockchain for a while now, and it presents one of the biggest challenges to the expansion of the decentralized marketplace and the general momentum for blockchain innovation. Layer 2 solutions have provided a solid temporary solution, but as these protocols become more popular, they too will face the same bottlenecks that layer 1 solutions did. In theory, it’s possible to create layer 3, then layer 4, and so forth solutions, but that architecture isn’t stable and doesn’t preserve the decentralized nature of the blockchain at its core.

bloXroute is a very promising solution. It simultaneously increases the speed by fundamentally improving on the way information is processed in a blockchain, but also does not affect the blockchain at all, meaning consensus protocols and neutrality can both be wholly preserved. It’s a very versatile, scalable, and technologically adept solution for one of the biggest challenge’s in the blockchain ecosystem. Moreover, its adaptability, collaborative focus, and BLXR token make its business model quite compelling––it has exciting potential for expansion.

As more blockchain innovation occurs, people will demand faster speeds and lower rates. bloXroute might just be the best way to get there.
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