How Overlay Networks Can Change Web3

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The early internet concept of an overlay network plays an important role in the formation of blockchain infrastructure.

The framework of a technology “stack” has been helpful in understanding the function of various blockchain infrastructure components and the role they are designed to play within the Web3 ecosystem.

For example:

In 2016, the dissertation “fat protocols” drew a line between the protocol layer and the application layer in blockchain software development, and advanced theories about where value would grow fastest. Of the protocols, “Layer 1 Protocols” are the basic layer of consensus, on which applications are built. Examples are Bitcoin and Ethereum. “Layer 2 protocols” usually offer faster and cheaper consensus, with lighter guarantees, and periodically rely on reference to Layer 1. Examples include Lightning Network and Polygon.

To date, the discussion of blockchain infrastructure has lacked a well-known concept that played a major role in the evolution of the Web2 technology stack. That is, the overlay network. It is our belief that overlay networks will become an important concept in the development of the Web3 stack, which provides interoperability that securely connects ecosystems, assets and users.

What is an overlay network?

An overlay network provides services for an ecosystem that are otherwise unavailable, expensive, or inefficient. It sits on top of other networks and its global “visibility” to other networks allows it to provide better quality of service.

Some of the core features that overlay networks for the Internet provide are caching, routing, and security. Let’s see why these properties are fundamental to the Internet and then see what services we need for Web3.

Like the blockchain infrastructure we know today, the internet is made up of several networks. A user in North America does not use the same network as a user in East Asia. It is no problem for those two users to communicate and share content, thanks to overlay networks.

The concept of overlay networks was refined by researchers at Akamai, a Web2 infrastructure company that pioneered the development of content delivery networks (CDNs). As overlay networks, CDNs made it possible for your computer to retrieve the content of a website from a remote server located somewhere around the world, by caching that content on a gateway server somewhere nearby. By connecting to the overlay, users benefited from speed and security that might not otherwise be available.

Are Web2 overlay networks nice to have? It is certainly possible for an application developer to buy a rack of additional servers, install routers and monitor their own firewalls for threats. But it is expensive, and hardly anyone, except very large organizations, can afford to properly manage and operate such services while working on their core business.

How an overlay network can deliver ‘asset location’

In Web2, interoperability is not controversial. In Web3 we have a lively debate about whether cross-chain activity is even a good idea. In short, we believe that this debate is not up for discussion: interoperability is inevitable. That doesn’t mean it will be easy.

When we apply the concept of an overlay network to Web3, we can’t just stick a label or flip a switch. A CDN provides what might be called ‘data location’. A Web3 equivalent should provide what we might call ‘asset location’. To protect those assets from misappropriation, it needs to replicate the security guarantees of connected blockchains, cross-chain.

As we see it, a Web3 overlay network needs to provide three things to deliver interoperability and asset locality:

Cross-chain routingTranslationSecurity

Below we briefly explain why each feature is necessary for the evolution of the blockchain infrastructure and the realization of the potential implied by the term ‘Web3’.

Cross Chain Routing

Blockchains are still relatively slow compared to Web2 networks. Minimizing the number of hops is critical. Without network-level routing, this logic is left to the smart contract layer, leading to higher development costs and gas fees.


To foster innovation, we need to let blockchains experiment with new consensus engines and smart contract languages. Today we are already seeing dozens of very different approaches to blockchain infrastructure. We have yet to cooperate between them. Translation overlays can efficiently translate one message packet format to another. Without an overlay network, the translation would be encoded at the application layer, again increasing development costs and gas fees.


On the internet, we take 10-20 hops to reach a website, through dozens of networks. Cloudflare is an example of an overlay network that provides protection against DDoS. It’s only possible because Cloudflare has strong “visibility” across the entire Internet topology and traffic. It resides on many networks, monitors traffic and blocks malicious traffic.

While this is great for the Internet, the Internet is only used for “unverifiable” information provision. Will this infrastructure be enough for blockchain security? Blockchain is all about verifiability and trust.

One argument people make is that we want full peer-to-peer connectivity: every blockchain should speak to every other blockchain. This is nonsense. We would end up with ~N^2 connections, and in a world of hundreds or thousands of blockchains, this doesn’t scale. An operator maintains connections to a manageable number of networks – say 10 – and assumes that there is a path from one of those 10 networks to all the other networks (possibly through other intermediate networks).

Imagine transferring an asset from a source to a destination chain, with 10 hops in the middle: 10 potentially different bridging protocols, making 10 different economic and security assumptions. This has huge implications for the trust and security of the assets and blockchain information we transfer.


While Web2 carries information, Web3 carries more: it has value. Bearer instruments are transferred within blockchain networks. Transactions are increasingly taking place cross-chain, between blockchain networks. Best-effort connections between networks would not suffice even for most web2 applications today. For Web3 users who put value on the line, the need for universal cross-chain infrastructure is even greater. Without it, we face higher developer costs, higher gas costs, and weaker blockchain security, leaving the transfer of assets and information across multiple networks across multiple networks to the application layer.

An overlay network can be a one-hop (or less) solution, enhancing blockchain security.

Platform administrators only need to maintain a connection to one overlay network. Overlay networks are set up and maintain many outgoing connections. Overlay networks minimize hops, save costs and latency, and improve security and trust in the process.

Because we are jointly building the blockchain infrastructure that underpins Web3 applications, we will not simply copy the architecture of the information internet. We must choose the concepts that are most applicable and useful. More importantly, we must apply them with attention to the aspects of Web3 that are new and difficult.

Sergey Gorbunov is an assistant professor at UWaterloo and a founding member of the team at Algorand. Galen Moore works in management at CoinDesk, business development at New Alchemy, is the founder of Token Report and editor-in-chief of American City Business Journals.

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