Via our partnership with Huobi and Hadax, we had the chance to take a sneak peek at the Global Blockchain Industry Strategy report, which is to be released during the upcoming Blockchain Festival in Vietnam. The report encompasses statistical data on past and future aspects of crypto assets and blockchain technology in general. In this article, we provide you with an overview of what Huobi covered in terms of blockchain technology issues, and their possible solutions, alongside our own opinion and research.

Blockchain Technology

Nowadays, all economic activities require a trustworthy third party, such as PayPal, for online transactions, or escrows for loans. These third parties lower uncertainties in regards to the likelihood of contractual agreements to be non-performing, and are cornerstones to today’s economic and transaction flows. However, this increase in trust has its drawbacks. First and foremost, these parties usually have a monopolistic position, and therefore charge high fees for their services. Secondly, as everyone uses these third parties, they become targets for hackers as their database is centralised and contains all users’ data – leading to data security issues. Thirdly, uncertainty issues are not completely removed but are migrated to an entity which may encounter cash flow issues, or go bankrupt leading to contracts being unable to be performed. Blockchain technology is a tool which could remove the need for third parties and their drawbacks, while at the same time removing the need for trust between parties.

Ref: Huobi Research.

Blockchain Technology’s Current Problem

The problem is that despite their advantages in comparison to centralised networks, current blockchain networks cannot support commercial applications at large scale, as we explained in our Blockchain In: Internet of Things article. Some of the major problems that blockchain technology suffers from are: scalability, privacy, and interoperability.

Scalability

Scalability is one of the main issues that blockchain technology currently suffers from, as demonstrated by the network congestion the Ethereum blockchain suffered from during the CryptoKitties saga, where transactions took hours to be performed, and transaction fees abnormally high. As we explained in our High-Performance-Blockchain analysis, the key to large-scale commercial application is for networks to have high transaction throughput, while maintaining low latency, which Ethereum cannot currently handle.

To solve these scalability issues, many solutions are currently being researched, such as the implementation of accelerated chips to hasten confirmations and transaction times, the use of sidechains to mitigate data processing from one blockchain to another (such as Bitcoin’s Lightning network), or Ethereum’s sharding, to name just a few.

Typical applications of sidechain include Lightning Network for Bitcoin, Raiden Network for Ethereum, Trinity for Neo, or AION for all AION-1 compliant blockchains. The aim of such protocols is to offload a given blockchain by sending transactions via these connected sidechains and put the end state of the transaction on the main blockchain – offloading all the processing of transactions from the main blockchain. For instance, using the AION protocol, people can use the most efficient (or cheapest) blockchain for processing data and send the final state of the transaction to the blockchain of their choice.

Another solution being thought of to scale the Ethereum blockchain is sharding. Sharding technology divides a blockchain network into many separate areas, called shards, with each shard assigned to a small group of nodes to maintain. Sharding includes transaction sharding and state sharding. Transaction sharding refers to assigning different transactions to different shards, in this way, parallel processing becomes possible, leading to high TPS. In contrast, state sharding allows the data state to be stored in different pieces on different nodes. In essence, it means that one single node is only responsible for saving a portion of the ledger.



Another example is the use of multi-layered structure, which is the isolation of transaction processing and data storage. Cordano (ADA) is the most well-known project which proposes this layered structure, which divides the blockchain network into a control layer and settlement Layer. The settlement layer is responsible for transaction confirmation and the flow of the coin, while the control layer runs smart contracts and will be programmed to recognise the ID of the data. In the same fashion, CPChain divides its blockchain layer from its application layer, so the blockchain only has to store data IDs (which are on a cloud) rather than the data itself – thereby reducing block sizes.

Privacy

Under a public blockchain environment, the network ledger is open to anyone and all transactions are transparent, and can therefore be tracked. The lack of privacy might be an issue for certain types of transactions, in the case of confidential corporate deals for instance. To propose an alternative to bitcoin pseudo-anonymity, many protocols developed alternatives, with the four main ones being: Ring Signature, Zero-knowledge proof, CoinJoin, and Invisible Internet Project.

Ring Signature is probably one of the most famous privacy protocols as it is used by Monero. With Ring Signature, whenever a transaction is initiated, the senders transaction is combined with the transactions of other users in order to form a ring. This process masks the origin of the transaction, and ensure that all inputs are indistinguishable from each other. On top of the Ring Signature, Monero also utilises Stealth Address technology to automatic generate one-time addresses for every transaction.

Zcash uses Zero-Knowledge Proof in order to allow anonymous transactions. The technology automatically conceals transaction information, such as sender information, receiver information, and the amounts. Only the users owning the private keys of the smart contract being performed have full access to the information.

CoinJoin is the technology being used by Dash. The protocol mixes multiple payments from multiple spenders into one single transaction, making the transaction more difficult to trace. In the meantime, in order to prevent masternodes from being attacked, Dash introduced Chaining and Blinding, allowing senders to choose multiple masternodes randomly with which to send the transaction. The system enables the mixing of transactions among these master nodes, and transactions are seen to be sent by the masternodes and not by the users themselves.

Interoperability

Blockchain networks are divided into private, consortium, and public blockchains, each having their own advantages and drawbacks, depending on application needs. Having one “blockchain” is not feasible as there is no one-size-fits-all solution; specific industries, with specific use-cases, need their own consensus mechanisms, economic models, privacy schemes, and centralization levels. For instance, IoT solutions will require extremely low fees and high TPS throughputs, while supply chain blockchains would require less TPS but request higher decentralization.

The problem is that currently, blockchains cannot communicate with each other. Therefore, various cross-chain technologies that could help different blockchains to interconnect are being explored. Some of the leading projects tackling this issue are AION, ICON, and NEO (with the development of NeoX). Nevertheless, most blockchains enable the creation of sidechains, such as CPChain or ICON. Sidechains are blockchains running in parallel to the main blockchain. Additionally, as we explored in the scalability section above, a sidechain using the same consensus protocol mechanism as the main chain can also validate transactions happening on the main chain.

Another interoperability solution is the one being used by Ripple (RPX), using escrows. Ripple uses its Interledger Protocol to connect different ledgers and lets users transmit currencies freely by using third-party connectors or validators. The Interledger Protocol adopts cryptographic algorithms and uses third-party connectors to create fund custody for two different ledger systems. Additionally, a trusted person or group will hear and respond to incidents on each side of the ledger system. Once all parties reach agreement on cross-ledger transactions, transactions are confirmed.

Ref: Ripple

Other famous iterations of cross-chain communication are the bitcoin Lightning Network, and Raiden Network for Ethereum, which use hash locking technology to allow for cross-chain payments. The Lightning network, being mainly used for transactions between Litecoin and Bitcoin, is realized through the establishment of off-chain payment channels between different blockchains, allowing for instant value transfer. In the same fashion, the Raiden Network will help Ethereum switch from its current model, where all transactions are passing through the blockchain, to a model where users transfer tokens by exchanging data off-chain without involving a global consensus protocol, while maintaining the security of the Ethereum network.

Lastly, some projects are teaming up together in order to allow their blockchains to speak with each other. ICON, AION, and WAN, formed the BIA in December 2017, in order to solve the blockchain isolation problem. AION, as we have already written about, aims to become the common protocol for all blockchains to connect to one another through the creation of a networked and federated blockchain.  The Aion protocol will enable the transfer of value and data between all Aion-compliant blockchains by utilizing bridges. In essence, Aion enables networks to communicate with each other, allowing any DApp to run on any blockchain within the network. In contrast, WAN is building a system to allow digital assets to be securely transferred and exchanged across any blockchain system. ICON, which we have also covered, is creating a system of sidechains, discussed above in order to connect all the industry chains to its main network.

Conclusion

For blockchain technology to become mainstream and used for large-scale implementation, the bottlenecks current blockchain platforms suffer from – scalability, privacy, and interoperability – need to be addressed. For instance, scalability issues are critical for IoT solutions as these could require millions of transactions to be performed in a single moment, and the confirmation time to be minimal. Many blockchains such as High-Performance-Blockchain or CPChain, which are directly targeting the IoT space, are working on some of the proposed solutions above in order to attract businesses to their platform.

The full Global Blockchain Industry Strategy report, covering more aspects of scalability issues and their solutions, will be available in “avant-premiere” at the Blockchain Festival Vietnam, sponsored by Huobi. If you are interested in joining the event and would like to receive a 50% discount from the ticket price, use our discount code: WRITE50.