The Role of Layer Zero Networks in the Blockchain Scaling Stack
On July 8, Marlin Labs, the organization responsible for the Marlin protocol, released its new OpenWeaver framework designed for creating relay networks between nodes that aim to help layer one networks such as Ethereum improve their scalability by reducing block propagation times. OpenWeaver is a blockchain agnostic framework and allows parties to identify blocks faster than is currently possible through conventional peer-to-peer node infrastructure with the hope that its adoption will improve the throughput, decentralization, and security of base—or layer one networks.
Fundamentally, networks like Marlin’s allow for parties, such as miners, to connect to a decentralized network of relay nodes that are located in different areas of the world, enabling parties to propagate blocks faster than they would otherwise be able to do so.
Theoretically, these systems offer three main benefits: improved scaling, greater node decentralization, and enhanced network security. Reducing block propagation times theoretically allows blockchain networks’ to experiment with shorter block times and larger block sizes due to the reduced time for all nodes to receive the latest block information. While scaling also depends on other factors such as storage of state, limitations with network latency have been a significant hurdle to increased throughput rates on layer one blockchains. Secondly, relay networks allow for layer one nodes to become more geographically dispersed, reducing the clustering behavior observed with Bitcoin and Ethereum nodes that emerges due to the physical distance between nodes, which hinders latency. As such, it is possible to achieve greater network decentralization with the same number of nodes. Notably, however, reliance on a relay network at the expense of running full nodes is, itself, a centralization vector since relays are generally run by a small group of entities, making it important that miners and other parties do not fully delegate their network responsibilities. Finally, it has also been suggested that, by reducing latency, the chance of blockchains forking into orphan chains will be reduced, as miners will receive block information more reliably. This means that hash power, in the case of Proof of Work networks, or token value, in the case of Proof of Stake networks, will not be dispersed among multiple competing chains, thereby protecting network security.
Aside from Marlin and its OpenWeaver framework, there are two other notable projects working on similar architectures: FIBRE, a Bitcoin-specific implementation, and bloXroute Labs, a blockchain infrastructure company. In the case of FIBRE, it contributed to a reduction of over 90% in block propagation time and the rate of forking. Despite such results highlighting the performance improvements that these systems can offer, layer zero scaling projects have generally garnered little attention within the blockchain industry and, compared to both layer one and two networks, are significantly underfunded. Marlin Labs and BloXroute Labs raised just $3 million and $11.6 million, respectively, while FIBRE has largely been volunteer-driven. When considering the fundraising activity surrounding layer one networks in the context of scalability (EOS, $4.177M) and, to a lesser degree, second layer scaling projects, the differential between these and layer zero projects is startling.
High-Level Blockchain Stack
Whether this discrepancy will continue is not clear, however, and there is reason to believe that the sector will see an increase in investment, both by way of equity- and token-based fundraising, relative to other layers in the blockchain scaling stack. Relay networks offer potentially lucrative revenue opportunities to other parties beyond miners, such as dApp providers, DeFi participants, and arbitrageurs, in particular, as well as other ecosystem players. The ability to create effective value extraction mechanisms—either through direct fees or a token economy—could, therefore, see major capital inflows for these projects over the coming years. Nowhere is this opportunity greater than in the Ethereum ecosystem, where a fully functional sharded network is still several years away. While FIBRE has no native token or value extraction mechanism, Marlin and bloXroute are both in the process of rolling out token sales worth closely monitoring. With so much attention currently on gas capacity and prices on Ethereum, and increased attention on scaling alternatives such as layer two systems, Smith + Crown suspects it is a matter of time before the industry applies greater attention to relay networks for their ability to offer enhanced scaling directly while also compounding the effects of improvements higher up the blockchain scaling stack.