Digital Currencies & Blockchain

Lecture 7 & 11

• Settlement & Transactional Layers
• Legal aspects of cryptocurrencies

Content

Tradičný transakčný systém

Tradičný urovnávací systém

RTGS

Účastníci siete publikujú každú jednu transakciu (gross settlement)

RTGS účet majú len najvyššie regulované inštitúcie

Banky typicky môžu na intradenné urovnávanie v RTGS používať povinné rezervy.

DNS

Účastníci siete si navzájom zúčtovávajú kreditné a debitné transakcie.

Následne urovnávajú čisté zostatky za dané obdobie v RTGS systéme.

Príklad: EURO1

DNS je vhodné pre veľké množstvá menších prichádzajúcich a odchádzajúcich platieb

Funkcie

Instant payments / card schemes

Interbank DNS systems

RTGS systems

Non-domestic

settlement

Target2: 3 tps

VISA: 2,000 tps

Kryptomenové siete

Scalability

haha

Scalability

haha

Superfast blockchains (L1 solutions)

These guys want to merge payment & settlement system into single, almighty RTGS

L2 Solutions

These other guys want to stabilize L1 as RTGS equivalent "settlement layer" and build L2 (L3,..) on top of it as "transaction layer"

L1 solutions

haha

Alteration of PoW into a faster consensus algorithm.

Typical solution is some sort of DPoS or other randomness-based consensus.

Examples

Solana

Avalanche

Ripple

Terra

L1 solutions

haha

Sharding.

Splitting a single blockchain into shards with different randomly selected validators.

Examples

Polkadot

Ethereum 2.0

L2 solutions

haha

Settlement Layer: Bitcoin

Transaction Layer: e.g. Lightning Network

Settlement Layer: Ethereum

Transaction Layer: Plasma

Lightning Network

haha

HTLC based solution using native multi-sig functionality of Bitcoin blockchain.

Network of bidirectional payment channels enables micropayment delivery at almost no cost and time.

What is HTLC and what is "payment channel"?

Lightning Network

haha

Multisig 2of2

Lightning Network

haha

Updating balance between Alice and Bob

2

4

Alice

Bob

Lightning Network

Hashed Time-Lock: Closing of Channel

2

2

4

4

Both sides can decide to close the channel and publish the balance on bitcoin blockchain.

If Alice is a bad actor and tries to publish old balances, Bob can take all  bitcoins from the channel. And vice versa.

Lightning Network

Network of Lightning nodes / channels

Lightning Network

Lightning Network (notes)

1) Users run a Lightning Node.

2) Two users lock funds in a multisig on the blockchain. This opens a bi-directional payment channel between both of their Lightning Nodes.

3) Lightning transactions instantly update the balance of the payment channel without needing to involve the blockchain. The transaction data is stored locally on the Lightning Node.

4) As more Lightning Nodes come online, and more payment channels connect them, a peer-to-peer mesh network begins to form. This means that even if two nodes don't directly connect, they can still transact as payments are routed over the network of connected nodes.

5) To settle, a user closes their payment channel, with the net balance finally being broadcast to the blockchain.

Ethereum - Layer 2

Readings

• Mastering Bitcoin - Chapter 10
• Beginners Guide to Lightnin Network
  https://academy.binance.com/en/articles/what-is-lightning-network
• Bitcoin's Security Model: https://www.coindesk.com/bitcoins-security-model-deep-dive​
• Making Sense of Ethereum's Layer 2:
  https://medium.com/l4-media/making-sense-of-ethereums-layer-2-scaling-solutions-state-channels-plasma-and-truebit-22cb40dcc2f4​
  
  Additional Resources:
• Learn Plasma: https://www.learnplasma.org/en/learn/mvp.html
• Easy explainers: https://education.district0x.io/general-topics/understanding-ethereum/understanding-plasma/
• Lightning Network: https://lightning.network/