Since the wave of interest into cryptocurrencies in late 2017, many blockchains have struggled to accommodate the high numbers of transactions that followed.
In particular, Ethereum was hit with high gas fees and slow transactions when the network got busy. This was partially due to a game called CryptoKitties
One possible solution to this problem is called the Raiden Network, which we explore below.
What is the Raiden Network?
It is an off-chain solution to scaling the Ethereum network. It is similar to the Lightning Network which is being built on Bitcoin.
It allows for multiple transactions to take place before recording the final balance on the Ethereum blockchain. This means fewer on-chain transactions.
How does it work?
In order to use the Raiden Network, you ‘wrap up’ an amount of ERC-20 tokens, allowing you to use an equivalent amount, off-chain. It's a bit like a debit card by which you can only spend what the card has access to.
You then send an on-chain transaction to open the payment channel - so the network knows it's there.
Payment channels are created between users on the network and work a bit like a tab. Once a set of payments have been made, the tab can be kept open to allow transactions to continue, or be closed in one single, on-chain transaction.
Digital signatures are used to ensure that the off-chain payments are coming from the two parties.
What are its advantages?
There are benefits of an off-scaling solution:
💸 Low-fees - By requiring fewer on-chain transactions, it has lower fees.
📈 Scalable - Blockchains sacrifice efficiency for security. Off-chain solutions are far more scalable.
👮 Private - Off-chain transactions are private until the final balance is recorded on the blockchain. This is more private than making all transactions on-chain.
🏎️ Fast - The Raiden network claims to be near-instant.
What are its disadvantages?
Taking blockchain transactions off-scale have their risks:
- 🔑 Security - Tokens reside in smart contracts which need to be watertight to avoid hacks. If they're taken off-chain, hacked, and put back on-chain, that can lead to issues.
- ⏺️ Centralization - Critics claim off-chain solutions are more centralized.
- 🍤 Small-transactions - It is designed to accommodate micro-payments, often across multiple channels, but is not necessarily reliable for large transactions.
Why is it needed?
Ethereum doesn’t currently have the capacity to support the global payments network and it is too slow for everyday payments. Alternative cryptocurrencies are criticized for sacrificing security or are too centralized. If all payments are stored on a blockchain, all full nodes need to store a huge amount of data.
By taking this data off-chain, it allows the Ethereum network to be used for large, or more important, transactions while everyday payments can be used on the Raiden Network.
Building a network like this takes a lot of time, requires extensive testing and audits. It will also be a target for hackers. However, if the Raiden Network is successful in its aims it could combine with Ethereum to become a scalable, private payment network for the whole world.