Rating-assisted Layer 2 Scaling of Distributed Ledger Technologies for the Internet of Things

Abstract

Experts herald that distributed ledger technologies (DLTs), such as the Ethereum platform, will eventually enable the Internet of Things (IoT) to be secure, scalable and autonomous. In this thesis, opportunities and limitations of state of the art distributed ledger platforms to support the IoT have been investigated. State channels are a layer 2 scaling approach and do not require every transaction to be processed by the distributed ledger. This research suggests enhancing state channels by integrating a reputation system to improve the suitability of DLTs for the IoT. When opening a state channel, some funds must be locked up in a smart contract as deposit to prevent dou-ble spending. To regain funds, participants of a state channel can close it cooperatively. However, if just one party requests closing of a channel, a challenge period must be waited until funds get paid out. To incentivize state channel participants to behave co-operatively and minimise periods of funds being held in escrow, the adoption of a smart contract based reputation system is proposed. Assuming that entities behave econom-ically driven, rating assisted state channels have the potential to improve the liquidity, efficiency, transparency and overall service quality in digital machine to machine mar-kets.