State Channels ‘Significantly Reduce Congestion and Transaction Fees,’ Ideal for Decentralized Exchanges — Louis Bellet

According to Louis Bellet, the founder of the Layer-3 peer-to-peer protocol Yellow Network, crypto trading has not scaled largely because it remains unregulated in many places which in turn “greatly slows down its growth and produces tons of scams.” In contrast, traditional finance (tradfi) is widely seen as “a well-oiled machine” and this according to Bellet may be down to the sector’s “well-established regulatory frameworks and policies in place.”

State Channels Ideal for Apps Which ‘Require Rapid Transactions’

Still, in his answers sent to Bitcoin.com News, Bellet sought to link traditional finance’s scalability to the “usage of clearing systems.” He argued that such clearing systems help to “mitigate counterparty risks and obviate the need for speedy settlements.” According to Bellet, until and unless this vector is “fully explored and optimized” in the crypto space, trading will not scale as some are hoping.

Meanwhile, when asked about his views on so-called state channels, the Yellow Network founder said these help to “significantly reduce congestion and transaction fees.” Lower fees and a network with less congestion make state channels an ideal option for apps which require rapid transactions, the founder insisted.

State channels, which are described as a blockchain second-layer solution, make it possible for a group of participants to perform an infinite number of transactions off-chain. They can also ensure there is strict privacy on the trade channel, according to Bellet, something which is valued by today’s traders.

Elsewhere, in his written answers sent to Bitcoin.com News via Telegram, Bellet also shared his thoughts on what he sees as factors inhibiting the growth of crypto trading.

Below are Louis Bellet‘s answers to the questions sent.

Bitcoin.com News (BCN): Cryptocurrency trading is generally seen as being siloed and to some extent inefficient. Can you identify some of the challenges associated with these limitations that traders often encounter?

Louis Bellet (LB): Limited Exchange Availability — Despite common misconception, there are very few exchanges, making regulation a rather challenging task. They often assume multiple roles—custodian, broker, and exchange, all under one roof—and operate from jurisdictions where regulatory oversight is lax or non-existent.

Consumer Protection Deficit — Consumers are left with little to no protection, alongside a lack of regulated solutions to choose from.

High Counterparty Risk — The current state of crypto produces a high level of counterparty risk.

Monopolistic Landscape — Existing exchanges enjoy their monopoly, making it almost extremely difficult for new local exchanges to break into the market, especially when it comes to sourcing liquidity.

Web 2.0 Legacy Systems — CEXs [centralized exchanges] are yet to harness the benefits of blockchain technology; they operate on legacy Web 2.0 systems, deemed obsolete by conventional financial standards.

BCN: Although blockchain has brought decentralized computation, the industry has not been able to scale crypto trading to the extent that traditional finance has. In your opinion, what is holding back the scalability of crypto trading?

LB: I know that is not what people in crypto want to hear but traditional finance is such a well-oiled machine mainly because of its well-established regulatory frameworks and policies in place. While we do see steps taken towards keeping crypto under control, it still remains relatively unregulated in many regions, which greatly slows down its growth and produces tons of scams.

The key to scalability in traditional finance lies in the usage of clearing systems, which mitigate counterparty risks and obviate the need for speedy settlements. This vector has yet to be fully explored and optimized in the crypto domain.

BCN: Decentralized exchanges using Layer-1 chains have low throughput hence they often struggle to meet the expectations of major traders and institutions. Now it is said that Layer-3 solutions such as yours use state channels to improve the public blockchain throughput. What are these state channels and how do they improve the throughput?

LB: State channels are very simple primitive smart contracts that lock funds based on a state. The use of state channels allows for depositing collateral on-chain and then continuing operations off-chain. This bypasses the consensus bottleneck and expedites transaction finalization, significantly enhancing throughput.

Using state channels significantly reduces congestion and transaction fees, making it ideal for apps requiring rapid transactions as we see on decentralized exchanges.

BCN: Your peer-to-peer (P2P) mesh network is said to connect brokers across blockchains which allows them to reach tokens locked on isolated networks without cross-chain bridging. Could you briefly explain to our readers how this works?

LB: Our P2P mesh network uses a decentralized protocol allowing for assets and collaterals to be locked securely. This protocol is compatible with existing custodian solutions since assets don’t partake in the trading process. Participants have the flexibility to withdraw their assets or request settlements on their preferred blockchain, eliminating the necessity for cross-chain bridging.

BCN: It is quite common and logical that traders do not want their sensitive trade information to be made available to the public. How do the so-called state channels ensure the privacy of user information?

LB: This is an additional benefit of using state channels, from the moment all operations go off-chain, there is strict privacy on the trade channel. The way state channels work is only reflecting the initial state and the final result of trades on the main blockchain. The rest of the transactions are only visible to channel participants.

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