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Advanced Vocab

Airdrop

An “airdrop” is a distribution of crypto tokens for free. It can be targeted (such as to specific key influencers) or distributed to all existing addresses on a given blockchain network.

Airdrops are like coupons or free samples that you might receive in the mail from a local merchant. Just like a coupon incentivizes you as a customer to shop at a specific store, so a free token might encourage you to try a new decentralized application or dApp. In other words, it is a bootstrapping mechanism to encourage initial adoption.

Multi-Signature (multi-sig)

A special type of digital signature scheme where there can be multiple signers for a single digital signature. A multi-signature or “multi-sig” transaction is only valid if it is signed by a set threshold of participants, just like some legal documents require a co-signer.

Multi-signature schemes enable more advanced smart contracts and Layer 2 scalability solutions. They are also particularly important for digital asset custody.

Sidechains

A sidechain is an external secondary blockchain protocol that is connected to a primary blockchain network (mainchain). Sidechains are typically designed to allow for the transfer of data and value between themselves and the mainchain, and oftentimes use a different consensus mechanism than the mainchain.

  • As a result, sidechains can allow for a higher degree of flexibility and scalability, given that systems with a significant sidechain interoperability component are often designed to cater to a broader range of enterprise and individual users

Virtual Machine (VM)

The actual code that is ran by computers to carry out the blockchain’s smart contracts. EVM (Ethereum Virtual Machine) is a popular blockchain VM.

A Bridge

A bridge allows independent blockchains to communicate with each other.

  • Ex. On the Polkadot network, a bridge is used to attach parachains and the main Relay Chain to other external blockchain networks such as Bitcoin and Ethereum. Polkadot data transmits from its main Relay Chain to parachains, attached to which collator nodes assemble all the transactions

A Fork

Fork is a broad term, which mostly stems from software development. Creating a ‘fork’ of software means to take an existing copy of something, and modifying it. Below we define how ‘fork’ can be used in context.

A fork happens whenever a community makes a change to the blockchain’s protocol, or basic set of rules. When this happens, the chain splits — producing a second blockchain that shares all of its history with the original, but is headed off in a new direction.

Most digital currencies have independent development teams responsible for changes and improvements to the network (much in the same way that changes to internet protocols allow web browsing to become better over time), so sometimes a fork happens to make a cryptocurrency more secure, add functionality, or to resolve a disagreement within the community about the cryptocurrency’s direction.

  • Soft fork: Think of a soft fork as a software upgrade for the blockchain. As long as it’s adopted by all users, it becomes a currency’s new set of standards. Because the end result is a single blockchain, the changes are backward-compatible with the pre-fork blocks.
  • Hard fork: A hard fork happens when the code changes so much the new version is no longer backward-compatible with earlier blocks. In this scenario, the blockchain splits in two: the original blockchain and new version that follows the new set of rules. This creates an entirely new cryptocurrency – and is the source of many well-known coins.

A fork can also be used in the context of crypto projects. For example let’s use the popular deFi application OlympusDAO on Ethereum. People are able to take the code/principles from this project and create new version of it on new chains — these are called ‘forks’ of OlympusDAO (such as $TIME/Wonderland on AVAX)

Sharding

Sharding is a mechanism that is used to partition a blockchain network or other type of computer network or database. Its purpose is to distribute the network's computational and storage workload across a broader set of devices, or nodes, in order to increase the throughput and transaction speed of the entire system.

Layer 1’s & Layer 2’s (L1s & L2s)

Layer 1’s

  • A Layer-1 blockchain (also known as the parent chain or root chain) is typically a name used to describe a main blockchain network protocol such as Ethereum or Bitcoin.. Layer-1 blockchains are simply the main network that a Layer-2 scaling solution attaches to in order to improve the scalability and transaction throughput of the main chain, or Layer 1.
  • The name Layer 1 comes from its relationship with Layer-2 scaling solutions such as state channels, rollups, nested blockchains, and plasma side chains

Layer 2’s:

  • Layer-2 protocols are specifically designed to integrate with the underlying blockchain to improve the transaction throughput. They rely on the consensus mechanism and security of the main chain.
    • Ex. Immutable X is a Layer-2 scaling solution for NFTs on Ethereum. It allows developers to build marketplaces, games, apps, and more. While Ethereum handles only about 15 transactions per second and suffers from high-gas fees, an L2 solution like Immutable X handles 9,000 transactions per second with zero gas fees. It leverages Ethereum’s well-developed security, connections, and ecosystem to help developers.

Layer 2 Scaling Solutions

Roll-ups

In short, Rollups are solutions that perform transaction execution outside Layer 1 but make transaction data available on Layer 1. By moving computation off chain, they free up more space on-chain. Onchain data availability is crucial, since it allows Ethereum to double check the integrity of rollup transactions.

  • ZK roll-ups
    • ZK-rollups are one of many Layer 2 scalability solutions and work by rolling up mass transfer processing into a single transaction. ZK roll-ups use zero-knowledge succinct non-interactive arguments of knowledge (zk-SNARKs) to validate transactions. Zk-snarks refer to a proof construction where one can provide proof of certain information, e.g. a secret key, without revealing that information itself, and without any interaction between the prover and verifier.
    • ZK = “Zero Knowledge”...As a "zero knowledge proof" approach is used to present and publicly record the validity of the block on the Ethereum blockchain, ZK reduces computing and storage resources for validating the block by reducing the amount of data held in a transaction; zero knowledge of the entire data is needed.
  • Optimistic roll-ups
    • In optimistic rollups, batches of transaction data are posted to the main chain and presumed to be valid (optimistic) but can be challenged. Theoretically, anyone can challenge them by submitting a claim, also known as fraud proof, to prove that a batch committed to the chain contained invalid state transitions. If the fraud proof is valid, these invalid state transitions would be rolled back
    • The challenge with optimistic roll-ups, from a usability perspective, is that batches posted to the main chain can be disputed for several days (typically 1 week) during which funds on these Layer 2s cannot be withdrawn back to the main chain - this means Layer 2 users are not liquid.

Plasma & Validium

  • Plasma
    • Plasma is a construction scalability method that places layer 2 blocks on top of the Ethereum blockchain in the form of a side chain. The implementation of Plasma gives the ability of hundreds of side chain transactions to be processed offline with only a single hash of the side chain block being added to the Ethereum blockchain. The problem with Plasma is that for a user to withdraw from the side chain, they must retain a high amount of data so that enough exists for validation; a lengthy challenge period also requires users to stay online or lose reward.
  • Validium
    • Validium works very similar to ZK rollups except data is stored off-chain. Since transaction data is not published on-chain, this introduces new trust assumptions as users must trust an operator to make data available when it is needed. This is typically achieved through a committee of known entities who stake their business reputation on being reliable data providers. If an L2 node operator stops servicing withdrawal requests, this committee will make its copy of the data publicly available.