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Rowan Spencer, Editor In Chief
There. We said it.
But, if we want to delve into why not everything has to be on-chain, then we’ve got to revisit the basics and answer the following rudimentary questions:
What is the value of having something on-chain (as opposed to off-chain transactions)? Does everything we do need to have a crypto component? Is there such a thing as “crypto overreach?”
The decision to use on-chain or off-chain transactions should be driven by the specific use case, considering factors such as data sensitivity, performance requirements, regulatory compliance, and user experience. When considering that both on-chain and off-chain transactions can provide the optimal combination of security, efficiency, privacy, and scalability, it’s best to ensure that blockchain technology is applied where it unequivocally adds value.
The concept of trustless permanence is necessary in a given situation, the primary question to ask is, “Do I want complete, unalterable permanence and trustlessness for this particular piece of content?” If the answer is a resounding “Yes,” then on-chain storage becomes a suitable choice. It’s crucial to acknowledge that not every piece of content demands such a level of permanence.
Consider the example of posting content on a social media platform. While some posts may hold sentimental value and deserve to be immortalized on-chain, fleeting content could be best suited for more flexible storage solutions, which are often provided by web2 databases. A more practical approach might involve adopting a hybrid model. In this model, users have the flexible option to choose between on-chain and off-chain storage, and platforms can strike a balance between trustless permanence and user control.
Trustless permanence is a powerful concept in web3, but it should not be applied blindly to every piece of content. Users should have the freedom to determine the permanence of their data based on their needs and preferences. So, before rushing to store everything on-chain, let’s consider its value proposition and its applicability to each specific use case out there.
One of the primary challenges with blockchain technology is scalability. Blockchain networks, with their decentralized nature and consensus mechanisms, have inherent limitations in terms of transaction throughput. By incorporating off-chain solutions such as state channels and sidechains, we can alleviate network congestion and enable higher transaction throughput.
Despite progress, scalability remains a formidable challenge. Recently, there’s been an explosion of Layer-2 solutions, such as Celo migrating to Ethereum’s Layer-2, and the adoption of zero knowledge (zk) rollups like Starknet and Zk Sync. It is important to acknowledge that even with Layer-2 solutions, the transaction per second (TPS) rates might not be sufficient or widespread for mainstream adoption. Currently, Solana stands out as one of the few Layer-1 blockchains with impressive TPS capabilities.
Network congestion and slower processing times can diminish the appeal of blockchain technology for everyday users who are accustomed to seamless experiences offered by web2 platforms.
Blockchain transactions usually incur fees, which can pose a barrier for users and businesses looking to leverage the technology. By strategically using off-chain storage and processing, we can reduce costs associated with on-chain transactions. Storing larger files or frequently updated data off-chain can significantly lower expenses. High transaction fees not only deter potential users but also limit the scalability of decentralized applications.
Arweave, the novel blockchain protocol, focuses on permanent, tamper-proof, and low-cost data storage. Instead of relying on traditional blockchains with high transaction fees, Arweave introduces a unique consensus mechanism called “Proof-of-Access” (PoA). This mechanism allows users to pay for data storage upfront, removing the need for recurring on-chain fees. This off-chain approach drastically reduces expenses for long-term data storage, making Arweave a good option for archival purposes.
While blockchain provides transparency and immutability, not all data should be exposed on a public ledger. Confidential or sensitive information requires robust privacy protection. By choosing to keep certain data off-chain and leveraging encryption techniques, we can ensure that personal, medical, or proprietary information remains secure and private.
One example of this is Oasis Labs, a blockchain-based platform that employs a technology called “confidential smart contracts” to protect sensitive data. These smart contracts allow developers to write code that executes securely while keeping data inputs and outputs encrypted. Sensitive data remains off-chain and encrypted, and only authorized parties can access it.
Regulatory compliance is a critical aspect. When leveraging off-chain solutions, businesses can ensure compliance with regulations such as KYC (know-your-customer) and AML (anti-money laundering) without compromising the transparency and audibility offered by the blockchain. Storing sensitive data off-chain allows for appropriate controls while leveraging the benefits of decentralized systems.
Polybase is a decentralized protocol that embraces effectively using off-chain storage, zk-STARK proofs and a carefully designed role system. With its state rollup and key-value store, Polybase ensures data integrity, privacy, and accessibility. These zk-STARK proofs for off-chain activities, which are then combined into a root proof that is verified on the blockchain. This allows for efficient data processing without congesting the main blockchain.
Not everything needs to be recorded on a public blockchain; the evolving landscape of blockchain technology calls for a nuanced understanding of privacy and data sensitivity. While public blockchains offer transparency and immutability, not all data needs to be recorded on-chain. Privacy-enhancing technologies like zk proofs provide a promising solution, allowing verification of transaction validity without disclosing sensitive details.
Embracing off-chain solutions enables businesses to protect confidential data, comply with regulations, and strike a balance between trustless permanence and user control. Achieving widespread adoption of web3 requires addressing these concerns. Ultimately, the decision to use on-chain or off-chain transactions should be driven by the specific use case, ensuring that blockchain technology is applied where it truly adds value.