Plasma Protocol & What It Means to Digitex Futures
Since the dawn of Bitcoin (BTC) on January 3, 2009, one of the biggest issues for decentralized digital money has been scaling. Ethereum, in particular, faces more scrutiny in the business world as most of the tokens in the space are based on its technology. There’s a lot of money to be made if the scaling issue can be fixed, especially when it comes to trading platforms. But what does this all have to do with the Plasma Protocol?
The Plasma Protocol is the brainchild of Vitalik and Joseph Poon (co-founder of the Lighting Network). To be clear, we’re not going into the weeds on the technical side, but you should understand enough about how it works by the end of this and what it will mean for crypto exchanges.
Breaking Down the Plasma Protocol
Plasma is a second layer technology solution for sidechains, meaning if it were on a pizza it would be the tomato sauce. It is not the main blockchain. The pizza reference is to relay where it sits in the different grouping of protocols when executed. Plasma creates what are called sidechains or subsidiary networks (depending on who you ask). This is the method Ethereum is planning to use to address the scaling issue.
Think of a tree. You have the main trunk (AKA the main Ethereum blockchain). Then you have the branches (that would be the sidechain implemented using Plasma technology). In case you missed that and to be more technical, the Plasma protocol sets up a sub-blockchain.
The main factor in the sidechain is that it’s created by a smart contract on the main chain. The smart contract will serve as the rule book for how the chain will function, what its consensus will be (which can be different from the main chain), what token will be used, how the participants will act, and what tasks will be done. Taking it one step further, multiple sub-chains can be set up following the Merkle Tree architecture.
How Does This Help with Scaling?
Think of it this way, using the production assembly line as made popular by Henry Ford for the Model T as an example. This would be the smart contract on the main chain (also called the root chain). Building a whole car is time consuming and complicated if you have just a few workers doing one whole car at a time.
So instead, you break the component building tasks (function computations) down into tiers of complexity. Each tier is a new subsidiary network (also called a child chain). This process is called blockchain in blockchain.
In this example, each tier of workers is performing a function that aids in the overall production of the car. Technically, for the smart contract, each level is carrying out micro functions that follow the governing rules of the parent chain above it.
Now the kicker is this method of workload distribution is cheaper than having all the work done on one level. That’s because potentially there’s no limit on the number of child chains that can be created. In short? Ethereum has potentially figured out how to scale from 10 to 15 transactions a minute to billions of transactions per second. That’s a pretty big deal.
The second part of the cost saving is having the bulk of the transaction work done off chain, which means no gas costs. The condensed explanation is the main blockchain is periodically updated with only the opening, closing (settlements), Proof of Fraud inquiries, and disputes.
But Where’s the Security and How Do You Stop Bad Actors?
As mentioned earlier, Plasma Protocol uses the Merkle Tree data structure. This is used to keep the integrity of data and accuracy. And allow parties not in the smart contract to be observers because the hash of all sub-chains is recorded in the smart contract on the main blockchain.
In order to open a sidechain using the Plasma protocol, an operator must open a smart contract using Proof of Stake. This in turn freezes a certain amount of their coins from being used anywhere else in the main blockchain.
Any party in the child chains or any observer of the smart contract can submit a Proof of Fraud claim. If a bad actor is found, the penalty is forfeiting tokens staked by whoever issued the block. This way, all data passed to the main chain must be verified before being moved up the parent chain.
If sub-chains are compromised, the smart contract (on the main blockchain) using the Plasma Protocol has the ability to perform a mass exit. Basically, closing the smart contract and allowing everyone to retrieve their funds back.
Now Let's Talk Application
At Digitex, we have our own utility token, the DGTX token, which is actually incorporated in every aspect of the platform. DGTX is required to carry out any function on the platform. The wallet you trade with is valued in the token and so are your gains and losses. The DGTX is an ERC 223 token, meaning it can be used on a sidechain.
Put simply, Plasma is a system for opening and maintaining State Channels, much like the Lightning Network on Bitcoin. Using Plasma sidechains, the Digitex Futures Exchange will operate without holding any customer funds. This means that traders won’t have to trust the exchange with holding their DGTX tokens.
Instead of depositing DGTX by sending them to the exchange, traders will lock up an amount of DGTX tokens into a Plasma sidechain and that is their available to trade balance. In this way the trader keeps control of his or her DGTX tokens and doesn’t have to trust the exchange but he cannot back out of a losing trade. The tokens are locked up until the trader or the exchange closes his open positions and cancels any unmatched orders he has.
The trader’s profits and losses are updated on the sidechain/state channel in real time which is possible because they are not hitting the main chain, saving time and gas costs.
Plasma will be a game changer for the Ethereum network. Massive scalability on an almost unlimited scale is coming soon. The Digitex Futures Exchange will be one of the first live applications to use this brand new technology to revolutionize futures trading, allowing traders to participate in commission-free markets without needing to trust the exchange with their money.