How overlay networks could change Web3

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The Internet’s early concept of an overlay network has a significant role to play in shaping the blockchain infrastructure.

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

For example:

  • In 2016, the “fat protocols” thesis drew a line between the protocol layer and the application layer in blockchain software development, advancing theories about where value would accrue most quickly.
  • Among the protocols, “Layer 1 protocols” are the consensus base layer, upon which applications are built. Examples include Bitcoin and Ethereum.
  • “Layer 2 protocols” typically offer faster and cheaper consensus, with lighter guarantees, and rely periodically on reference to Layer 1. Examples include the Lightning Network and Polygon.

Missing from the discussion of blockchain infrastructure to date is a well-known concept that played a major role in the evolution of the Web2 technology stack. That’s the overlay network. We believe that overlay networks will become an important concept in the development of the Web3 stack, providing interoperability that securely connects ecosystems, assets, and users.

What is an overlay network?

An overlay network provides services to an ecosystem that are otherwise unavailable, expensive, or inefficient. It sits on top of other networks and, by virtue of having global “visibility” to other networks, can provide a better quality of service.

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

Like the blockchain infrastructure we know today, the Internet is made up of disparate networks. A user from North America does not use the same network as a user from East Asia. There is no problem for those two users to interact and share content, due to the overlapping 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 fetch a website’s content from a remote server somewhere in the world, by caching that content on a gateway server somewhere nearby. By connecting to the overlay, users benefited from speed and security that were otherwise unavailable.

Are Web2 overlay networks any good? It’s certainly possible for an application developer to buy a rack of extra servers, install routers, and monitor their own firewalls for threats. But it’s expensive, and virtually no one except very large organizations can afford to manage and operate such services well, while working on their core business.

How an overlay network can offer ‘asset locality’

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

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

As we see it, to offer interoperability and asset locality, a Web3 overlay network must offer three things:

  • Cross-chain routing
  • Translation
  • Security

Below, we briefly explain why each feature is necessary for the evolution of the blockchain infrastructure and the realization of the potential that the term “Web3” implies.

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 encourage innovation, we must allow blockchains to experiment with new consensus engines and smart contract languages. Today, we already see dozens of very different approaches to blockchain infrastructure. We still need to interoperate between them. Translation overlays can efficiently translate one message packet format to another. Without an overlay network, the translation would be coded at the application layer, again leading to higher development costs and gas fees.


On the Internet, we take 10 to 20 hops to reach a website, traversing dozens of networks. Cloudflare is an example of an overlay network that offers DDoS security. It’s only possible because Cloudflare has strong “visibility” into the entire internet topology and traffic. It is found on many networks, monitors traffic and blocks malicious traffic.

While this is great for the Internet, the Internet is only used for the delivery of “unverifiable” information. Will this infrastructure be adequate for blockchain security? Blockchains are all about verifiability and trust.

One argument people make is that we want full peer-to-peer connectivity: every blockchain needs to talk to every other blockchain. This makes no sense. We would end up with ~N^2 connections, and in a world of 100 or 1000 blockchains, this doesn’t scale. An operator will maintain connections to a manageable number of networks, say 10, and will assume that there is a path from one of those 10 networks to all other networks (potentially via other intermediary networks).

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


While Web2 carries information, Web3 carries more: it carries value. Bearer instruments are transferred within blockchain networks. Increasingly, transactions are taking place cross-chain, between networks of blockchains. Best-effort connections between networks would not be adequate, even for most of today’s Web2 applications. For value risking Web3 users, the need for a universal cross-chain infrastructure is even greater. Without it, we face higher development costs, higher gas fees, and weaker blockchain security, leaving the transfer of assets and information between chains across multiple networks to the application layer.

An overlay network can be a single hop (or less) solution, which improves the security of the blockchain.

  • Platform maintainers only need to maintain a connection to an overlay network.
  • Overlapping networks are established and maintain many outgoing connections.
  • Overlapping networks minimize the number of hops, save fees and latency, and improve security and trust in the process.

As we collectively build the blockchain infrastructure that supports Web3 applications, we will not simply copy the architecture of the Internet of Information. We must pick and choose the concepts that are most applicable and useful. More importantly, we must carefully apply them to aspects of Web3 that are new and difficult.

Sergey Gorbunov is an assistant professor at UWaterloo and a member of the Algorand founding team. Galen Moore works in administration 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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