Ethereum update: Solving Off-chain Scaling’s Liquidity Shortage and State Availability Challenges with Principled Cryptoeconomics Design
Any off-chain solution, while gaining scalability, is also making tradeoffs. Noticeably:
1. State availability vs Scalability tradeoff: While off-chain scalability solutions brings many intermediary application states off-chain, it also imposes impractical “always online” responsibility to the users, because the off-chain states should be always available for on-chain dispute in case of malicious counter-parties. Simply constructing a trust-free “watch tower” model, where “watch towers” also deposit certain security deposit as a collateral in case of them not performing the job, is not economically efficient and involves unnecessary interaction complexity.
2. Liquidity vs Scalability tradeoff: Off-chain solutions often need to “lock” certain amount of liquidity on the blockchain as channel deposits in the case of state channel or fraud proof bond (potentially less deposit comparing to state channels) in the case of sidechains. However, large crypto assets holders may not have the business interest or technical capability to run a off-chain service infrastructure, while people who have the technical capability of running a reliable and scalable off-chain service often do not have the large capital required to fill the outgoing channels’ deposit or the fraud-proof bond**.** This *mismatch* creates a huge hurdle for the mass adoption and technical evolution of off-chain scaling and eventually creates various centralization risks.
We posted a brief outline of a coherent cryptoeconomic architecture for both challenges. As we are releasing more details and updates about our cryptoeconomics model, we are posting the original article here as a start.
Ethereum is a decentralized platform that runs smart contracts: applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third-party interference.
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