Introduction

It’s likely that recently you have been fulfilled with words like “ZkEVM,” “Scalability,” “Tx throughput,” and so on. While Polygon enhanced the mediatic explosion of these narratives (also thanks to its mediatic strengths due to the Disney Accelerator announcement and the ZkEVM hype on Twitter), these didn’t come out overnight. Years of research & development are contributing to experiments and progress in the convergent project of Ethereum Scaling Solutions.

It’s acknowledged that Ethereum needs to scale because more and more users have started to use the Chain. That is also due to the big quantity of developers on Ethereum. This last one sees most blockchain and Web3 developers building on this specific chain.

This great human capital commitment leads to an increasing number of dApps (Decentralized Applications) that attract more and more users and, therefore, a higher probability of Network Congestion; it becomes clear that some Scalability improvement needs to be done.

While many attempts toward scalability improvements, L2s have been on the radar recently.

They are part of the off-chain scalability solutions that comprehend side chains, plasma, validium, and state channels. What is important to note is that you could develop these solutions in parallel; in other words, focusing on one specific solution is important if development and progress lead to great results, but it’s also important not to forget about the other tech proposals them all can work in harmony in a whole ecosystem, bringing differentiation and diversity too.

Here we are giving proof of what just mentioned and exploring the very suitable and efficient relation between state channels and L3.

Why Layer-3?

The L1 mania has led to a vertical commitment toward solving the Blockchain Trilemma; above all, the most effort and commitment spent was on Scalability.

So L2s began to be considered possible solutions to the point that 2022 was denominated as L222 (Layer-2 2022). The fact is that L2s come with a functionality problem, they are mainly focused on scalability, but they lack interoperability. L2s are starting to be used for specific applications, and surely one thing that will be essential in the future for mass adoption is the ability to connect these protocols in systems that allow the “contact,” the interaction, and the ease of navigation and translation between chains too.

So this is why L3 is needed. It enables aggregation, connection optimization, and communication of and between services. We could say that by design, L3s improve the cross-chain experience. This topic is super interesting because it binds virtual ecosystems and technologies, something that might arise many new opportunities and creations.

Another problem still presents today lies in the so-called “Liquidity Fragmentation.” More and more exchanges are being created, and therefore more markets, but these lack liquidity and struggle to maintain it.

In addition, all these markets are not communicating with each other, so the user experience also misses a potential improvement.

You could then expand the concept of Liquidity Fragmentation to Blockchains and Layers, which would benefit greatly by enhancing and solving this aspect. As a result, they form an ecosystem, and for this reason, opportunities are huge.

Finally, L3s, due to their cross-chain nature, ensure more safety from “Unique points of failure” like could be Bridges.

The latest is increasing targets for exploits and hacks; as a result, the Ethereum Bridges TVL is constantly decreasing over time.

Very big hacks occurred in 2022, too – Nomad bridge, Ronin bridge, and so on, so in this case, it’s more effective and efficient to utilize a Layer3 solution that avoids them, also because this type of solution saves you time spent at evaluating whether a bridge is safe or not, leading to a higher opportunity/cost ratio.

Yellow Network

Yellow Network is built by taking advantage of L3 and enhanced performance, efficiency, and privacy thanks to State-Channels (will discuss later).

What is Yellow Network, and how does L3 infrastructure add value?

Yellow Network is a decentralized cross-chain P2P overlay network that allows high throughput and speed of transactions to give users financial access to many digital assets, tokens, and cryptocurrencies spread around isolated networks.

In other words, Yellow has built an all-in-one place that, by leveraging Layer3 technology, can pool liquidity from several different brokers (brokers are meant as non-custodial businesses) from several different ecosystems, adding benefits connected with deep liquidity like less slippage and more offers to the market. A common shortage regarding DEXes and CEXes is right about liquidity, so it’s clear how Yellow could solve this situation by providing a mesh of inter and trans-connected markets.

Now, cross brokerage exchanges and connections are mainly powered by three systems and technology:

• FIX: FIX, or Financial Information Exchange, is a communication system based on State-Channels (off-chain scalability and privacy solution) that enables communications between brokers, exchanges, and trading firms to optimize the markets and make them more decentralized and accessible.
• ECN: ECN, or Electronic Communication Network, is a system that optimizes the match-making between buying and sell orders for securities, specifically focused on decentralized structures deprived of a middle entity or intermediary.
• State Channels: State Channels is an off-chain scaling solution that Yellow leverages, making it performant and more efficient. Since they represent a fundamental pillar in Yellow’s infrastructure, we will now explore them:

State Channels

As previously mentioned, this solution enables faster and more efficient transactions. But how is this outcome achieved?

State-Channels are multi-sig smart contracts that consist of channels. Channels are P2P protocols that, as the name implies, shift their state. States are mainly 2:

• Channel Opening
• Channel Closing

These two states reach consensus thanks to multi-sig contracts that make match-making of interests easier and, above all, require signatures of both parties for a state-change communication and validation to happen, so this way, a malevolent entity could not finalize an attack because the other party should agree on that state too.

Moreover, the smart contracts are launched with a set of defined rules, which further helps improve a match between peers.

Now, as the main state changes are the Opening and the Closing of channels, and the agreement is not so difficult to reach, there’s no need to overload the blockchain network with all the transactions made inside the channels; for this reason, State-Channels can decrease network load and congestion on the execution layers. The on-chain interaction is minimal. The only two on-chain transactions will show and record the channel's initial opening and the latest closing.

That is beneficial in terms of cost/opportunity once the channel opens. Nodes won’t validate all the transactions because the execution and validation consensus was just reached when both parties signed the contract. As a result, the only gas fees paid are linked with opening and closing the channels, while the “internal” transactions are gasless. Therefore, peers can trade at high tx speed and throughput.

Finally, since the minimum on-chain interaction with execution layers, all the transactions carried out (like funds transfers) are not shown on-chain. This way, Privacy is enhanced, and funds will be simply distributed as agreed on the latest state to the right peer, so on-chain funds will be visible in the wallet address. Still, all transactions which led to that outcome will not (note that this is only referred to as state-channels transactions initiatives). Only the channel’s members know the transaction history within the same one.

Network Participants

Within the Yellow ecosystem, several participants, brokers, and stakeholders are part of the network. Let’s see them:

• Retail Brokers: This category is defined as non-custodial businesses.
• Exchanges: A business can participate in the Yellow Network and kickstart the exchange by accessing deep liquidity, cross-chain retail users, and high scalability performance.
• Market Makers: They can collect trading fees and enable high liquidity in the market.
• Custodians: These entities provide custody services for users to secure their funds.

Network Participants are really useful to maintain a healthy network, and together with Yellow, a win-win situation is established. So they can have a high-level market depth through cross-chain and interoperability advantages Yellow offers. Also, there’s an incentive not to over-compete against other network participants, which means Yellow follows a Cooperation-oriented game theory.

$YELLOW token

Yellow Network is launching its token, $YELLOW, on September 2022. The token gives access to all the cutting-edge services and benefits the network can give.

Here are the Token Characteristics and Distribution:

Yellow Token Utility

• Enable open trading with other brokers and become an exchange or a network participant (see Network Participants section ^^^)
• Lock at least 250,000 $YELLOW tokens (4 peer-to-peer trading channels)
• Stake Collateral to exchange between brokers
• Reduced Trading Fees
• $YELLOW staking → rewards
• $YELLOW delegation to brokers → revenue share on trading fees

Conclusion

Yellow Network seems to be very promising in enhancing inter-operability in the multi-chain ecosystem crypto is shifting toward. State Channels are optimal for the use-cases the protocol is built for. The combination with Layer3 will make Yellow even more exact and efficient, allowing it to be a leader in the decentralized B2B cross-chain brokerage and the P2P trading market.

Interesting and to keep an eye on will also be future implementations of the $YELLOW token, which already has good tokenomics. This will make Yellow Network grow bigger and bigger as adoption scales up.

Ultimately, the protocol can reach, support and incentivize a collaborative ecosystem, making Yellow a total crypto market supporter and assistant in its growth and ethic.