Introduction

Layer-2 blockchain solutions are protocols that are built on top of an existing blockchain, with the aim of increasing the scalability and performance of the underlying blockchain. These protocols often utilize off-chain transactions and smart contracts to reduce the burden on the main blockchain, allowing for faster and cheaper transactions. There are many different types of such solutions, including payment channels, rollups, side chains, and more. Examples of layer-2 solutions include the Lightning Network and the Optimism Network.

What are layer-2 blockchain solutions?

Layer-2 blockchain networks are designed to increase the scalability and efficiency of base blockchain networks. For example, the Lightning payment network lowers transaction fees and speeds up payments on the Bitcoin network. These layer-2 networks work by moving some of the transactions and data that would normally be processed on the blockchain itself off the chain and onto a separate layer. The implementation varies, such as building sidechains, state channels, or payment channels. By offloading some of the workloads from the main blockchain, layer-2 networks can help to reduce congestion and increase transaction speeds. Additionally, layer-2 networks can also be used to add new functionality to a blockchain, such as the ability to conduct atomic swaps or to support more complex smart contracts, like Echo.

What kinds of layer-2 blockchain solutions are there?

There are several different layer-2 networks in use today. They include channel-based (payment channels and state channels), rollups, sidechains, and commit chains.

The diagram above lists some main kinds of layer-2 blockchain solutions. I will talk about them briefly.

• Channels – these are designed to provide exchange or transfer of state (funds) between participants. Channels are established over a communication medium by locking the participants’ funds on the blockchain. Participants then exchange funds between themselves, and the channel is closed by committing new states (balances) to the main blockchain. An example of a payment channel solution is the Lightning network.
• Crosschains – these are independent blockchains, running in parallel to the main chain. They are designed to run faster than the main chain by exchanging transactions between different main blockchains. One prime example is Polkadot.
• Rollups – these are a kind of a sidechain solution. Transactions are processed in batches and compressed. Then they are bundled together for on-chain verification. Anyone can publish transactions using rollups, so to prevent fraud there are two strategies: optimistic rollups (all transactions are true unless disputed) and Zero-Knowledge rollups (all transactions are false unless proven). One example of an optimistic rollup system is the Optimism network.
• Commit chains – these were introduced to resolve some weaknesses of the channel solutions. It involves an operator that initializes and maintains a commit chain enforced by a smart contract. An example of a commit chain is Polygon.

What kinds of attacks are there?

Achieving scalability while preserving security is paramount to layer-2 networks. To foster mass adoption, layer-2 networks must be very hard to crack and exploit. Nevertheless, any and all systems are prone to error, and these networks are no exception. Below, I will list some of the most interesting and impactful vulnerabilities present in layer-2 networks.

Most of these vulnerabilities target payment networks and require good knowledge of how these networks work, particularly the concept of HTLC. To get up to speed, I suggest reading this and this first.

Wormhole attack

Wormhole attack targets payment channels such as Lightning and allows the attacker to profit by stealing the transaction fees from intermediaries.

In this type of attack, the attacker must control 2 nodes in the payment path, with one or more victim nodes between them. Then the first node gets the funds and transaction fees for the intermediaries, it can bypass the intermediaries, sending funds to the second attacking node and claiming the transaction rewards. This attack undermines the stability of the network as nodes will be less incentivized to participate in it.

To remediate this attack, Anonymous Multi-Hop Locks can be used.

Griefing attack

This attack only focuses on DoS (denial-of-service) and does not by itself steal funds or turn a profit. It can target payment channels by initiating many payment transactions and locking the funds of all intermediaries for free. Then the attacker does not complete the transaction, waiting for the timeout to occur. This can be fixed by limiting the number of incoming channels, faster contract resolution, constant payment locktime, and implementing an incentive/punishment system for participant nodes.

Time dilation/eclipse attack

This is by far the most expensive and complex attack, and it can target many layer-2 solutions, not just payment channels. To pull off such an attack, an attacker needs to deceive the victim node’s clock, essentially making it go back in time.

The attacker uses multiple nodes that connect to the victim node until the victim exhausts its available connections. Once the victim is “surrounded”, the attacker controls (becoming a man-in-the-middle) what information the victim receives about transactions and new blocks. If the attacker delays the time so that the victim cannot dispute illegal transactions (by delaying time longer than the dispute timeout), the attacker can publish forged transactions concerning the victim’s funds and they will remain undisputed.

This kind of attack is very hard to counter effectively. One may watch for an abnormal routing failure rate as an indicator of the attack. You can also use watchtowers, that detect network discrepancies on the user’s behalf.

Balance lockdown

This relatively simple attack targets victims by locking their available funds and preventing them from participating in other transactions. Transactions in payment channels, such as Lightning, are atomic and will execute once all participants in the payment path have confirmed and locked the funds required to carry out the transactions. If an attacker sends a large payment p to another attacking node, p will be locked in all the intermediate nodes until the transaction is completed. Thus, the attacker only pays the price of the transaction fee to potentially block victim nodes from network participation.

By itself, this attack is not profitable, however, it can be used as a part of a larger attack, allowing the attacker to manipulate the transaction paths, blocking out the unfavourable ones and forcing transactions to take attacker-favoured paths.

To counterbalance lockdown attacks, the network may limit the length of payment routes and disallow loops in them, limiting the number of nodes that are blocked.

Balance discovery

This kind of attack aims to disclose the balances of nodes participating in payment channels, like the Lightning network. An attacker creates a payment channel between two of its nodes through a victim node. Then the attacker tries to send some payments with increasing amounts. The victim node must lock the funds in order to carry out the transaction, and if it does not have enough funds, the transaction will fail. The attacker keeps sending payments until they start failing, at which point they can estimate the approximate balance of the intermediary node. To further improve this attack, use binary search for fewer payments.

To prevent such information leaks, a payment channel can set the maximum transaction amount to be lower than the balances of the participating nodes. Another way is to introduce randomly failing transactions, thus deceiving the attacker.

Conclusion

In conclusion, it is important to recognize that layer-2 networks inherently trade off security for efficiency. However, this does not mean that they are not secure enough for day-to-day transactions as long as proper research is conducted and best practices are followed. It is important to thoroughly evaluate the risks and potential vulnerabilities of any network before using it for valuable transactions. Do you agree with this assessment? Share your thoughts in the comments below.

This article is inspired by paper “A survey of Layer-two blockchain protocols” by Ankit Gangwal, Haripriya Ravali Gangavalli, and Apoorva Thirupathi. For more information about layer-2 networks, I suggest reading it here.