One of the pressing issues nowadays, besides military conflicts, high inflation, ongoing pandemic, or bear markets, is the lack of scalability in many domains.
Just think about it no further than this summer: the lack of professionals in different sectors created major mayhem in the catering, hospitality, and tourism industries. Why? Too much demand and way too few workers to keep the services working without fault.
When it comes to our corner of the digital world, blockchain technology is also facing scalability issues that are plaguing existing blockchain networks. The same technology that gave us play-to-earn crypto games, NFTs, and so many other crypto innovations, is struggling with scalability.
Today we're going to venture into the depths of the blockchain trilemma, and hopefully, we'll emerge on the other side of it with a better understanding of the blockchain scalability problem, as well as the promising answers to it.
The blockchain trilemma: scalability, security & decentralization
What is the blockchain scalability trilemma? This notion refers to a widespread belief that a decentralized network infrastructure can only provide two out of three benefits at once when it comes to decentralization, scalability, and security.
The decentralized network's structure has its own challenges compared to a centralized network. For example, the central network infrastructure is dominated by the client-server relationship, while public blockchain networks use a decentralized consensus mechanism.
A public blockchain manages a widely distributed network of nodes in order to achieve data consensus over an infrastructure that is strong enough to block an outside attack while also ensuring transparency and equitable, open access. It's easier said than done.
Performance of current blockchain networks
Let's take the Bitcoin network as an example: while it's decentralized and secure, it's not that fast, with only a small number of transactions per second, between 3-7.
Public blockchain networks, like Bitcoin or Ethereum, provide poor performance and scalability, creating the need to use side chains to offload the transaction processing from the main chain.
Other blockchains are decentralized and can handle more transactions per second but are prone to security hacks. It's a win-some, lose-some situation.
Another breed of blockchain platforms are emerging, called blockchain 3.0. This blockchain technology is based on the principles of DLT (distributed ledger technology). Platforms like Polkadot, Aion, and Wanchain aim to resolve the performance and scalability issue by leveraging data structures, such as Directed Acyclic Graph, and reducing the processing latency of transactions through innovative validation and voting mechanisms.
The holy grail of blockchain technology is to obtain a decentralized network with watertight security simultaneously with successful internet-scale transaction throughput.
Before we check out the potential solutions for the blockchain trilemma, let's take a closer look at each of its three components.
Decentralized blockchain technology
Decentralized blockchain networks don't need a third party to validate the transactions or ensure that the whole system works.
Users have complete control over the network, and transactions are validated via a consensus mechanism, like Proof-of-Work, or Proof-of-Stake. This guarantees transparency and openness, as anyone can verify the transactions if they want to.
The problem that arises is that optimal decentralization decreases network throughput. Popular blockchain networks, like Bitcoin, that use Proof-of-Work (PoW) face this problem. As more miners validate transactions and add a new block to the chain, transaction speeds can drop significantly, affecting the widespread adoption of the blockchain system.
Blockchain security refers to the level of resiliency blockchain platforms have against external attacks and the network's capacity to resist any tampering. An underlying blockchain issue is that more freedom of entrance and exit from the network can help increase decentralization but lower security, as it becomes harder to verify the identity of new participants.
Some possible security risks in a blockchain network are double-spending, DDoS, Sybil, or 51% attacks. For example, a 51% attack is more probable when an open network with limited nodal distribution reaches consensus. The hackers can easily amass the hashing power they need to overwhelm the network and manipulate multiple transactions.
Blockchain scalability indicates the ability of a blockchain network to support future growth, depending on the number of nodes in the network, the number of transactions that the network can process, how fast the network can process, and so on.
The blockchain trilemma implies that blockchain scaling is possible, but only to the detriment of decentralization, security, or both. Many blockchain networks are trying to solve blockchain scalability issues with Layer-1 and Layer-2 solutions.
Scalability challenges on a blockchain network
Before we dive into the possible solutions to the blockchain scalability problems, let's observe the four main issues that can affect blockchain adoption on a larger scale:
Blockchain technologies have several limitations that can impact scalability. When processing a new transaction, each one of the blockchain nodes adds information regarding the transaction in the distributed ledger.
It is possible that the ever-expanding transaction history could negatively affect the entire network. On top of this, an existing blockchain network can also experience hardware limitations. As the blockchain network expands, setting up and maintaining the hardware required for operating nodes becomes quite challenging.
In order for blockchain scaling to be successful, these limitations must be addressed and fixed.
Higher transaction fees are another major issue that a scaling blockchain can encounter. The more people adopt cryptocurrencies and join a blockchain; the more complex the process of validating transactions becomes due to the demand for higher computational power for mining.
Each user has to pay a transaction fee ( called gas fee in regards to the Ethereum network) required to verify the said transaction. Increasing transaction fees can also affect the processing times, with more transactions in the queue awaiting to be processed. This in turn impacts scalability.
Increasing the block size of a network can pose issues as well. A more significant amount of transactions leads to time-intensive processes for executing them.
Let's look at the Bitcoin blockchain for a moment. In the beginning, every block in the network had the size of 1 MB, containing approximately 2000 transactions. As time passed and the number of transactions grew exponentially, so did the block size, therefore affecting scalability.
Response time refers to the period that a transaction awaits validation. The response time becomes longer and tedious when there's a high amount of transactions in the queue for verification, like in peak times.
The Bitcoin community has complained over time that the response time for building a new data block on the network can take 10 minutes or even longer. The response time must be cut considerably to solve the blockchain scalability problems.
Blockchain Scalability Solutions
There are several possible solutions to the blockchain scalability problem, divided into Layer-1 and Layer-2:
First layer scalability solutions
Layer-1 or on-chain scalability solutions make fundamental changes to the blockchain's properties and attributes, such as expanding the block size limit or lowering the block verification time.
Consensus protocol improvements
Improving the consensus protocols is one of the most common Layer-1 solutions. Many networks, like Bitcoin, use the Proof-of-Work consensus mechanism that offers reliable security but is relatively slow.
For this reason, other blockchain platforms are adopting the Proof-of-Stake (PoS) protocol as an excellent answer to the scalability problem. The Proof-of-Stake mechanism ensures consensus by selecting validators according to stakes in the network. A main blockchain like Ethereum can benefit from adopting PoS as it boosts the network's capacity, improving security and decentralization.
Segregated witness (Segwit)
Segwit represents a protocol upgrade for Bitcoin based-blockchains that changes how data is stored. Since the digital signature that verifies the sender's ownership and availability of funds can take up a lot of space in a transaction, Segwit removes the signature data to release more transaction capacity. The downturn of this protocol upgrade is that it doesn't help reduce the response time.
Segwit can also fix the problem of transaction malleability, which allowed the appearance of the Lightning network, an implementation of Layer 2 state channels architecture.
Sharding or horizontal partitioning is a form of database partitioning adapted from distributed databases. It involves breaking down transactions into smaller data sets called "shards." The network processes the shards simultaneously in parallel, enabling sequential work on numerous transactions at the same time.
This process allows information to be divided among several nodes while ensuring consistency. Shards offer proof to the main chain and interact with each other to share balances, addresses, and general states with the use of cross-shard communication protocols.
Second-layer scalability solutions
Layer-2 or off-chain solutions are additional secondary protocols installed on top of the main blockchain and used to offload transactions off the blockchain. They help with storage and network congestion issues.
A nested blockchain is a decentralized network infrastructure that leverages the main blockchain to establish parameters for a more extensive network. It can also ensure the execution of transactions over an interconnected network of secondary chains.
State channels or Payment Channels
Payment channels or state channels facilitate the two-way communication between a blockchain and off-chain transactional channels, improving overall transaction capacity and speed.
A payment channel uses smart contracts to execute transactions faster and with considerably lower fees. Bitcoin's Lightning Network is a popular payment channel implementation. Besides the Lightning Network, another example is the Raiden Network for Ethereum.
A sidechain represents a blockchain-adjacent transactional chain that can be used for large batch transactions. It uses an independent consensus protocol to that of the main chain, optimized for speed and scalability. By moving specific applications from the main blockchain to the sidechains, the load of the original chain can be eased substantially.
Layer 1 versus Layer 2 scalability solutions
We've looked at both on-chain and off-chain solutions for the blockchain scalability issue. What remains is to see when ones or the others are used:
- Layer 1 is usually known as the settlement layer. For instance, Layer 1 corresponds to the Ethereum blockchain, while Layer 2 refers to the Polygon Network (Layer 2) that is built on top of Ethereum.
- Transactions in a decentralized system on a blockchain require a large amount of processing power and time. That is why dApp developers are building directly on Layer 2 solutions, boosting the performance of their decentralized applications in order to improve the user experience.
- Transactions currently happening on Layer 1 networks ( like Bitcoin or Ethereum) are not scalable and incur high fees. Trying to solve this issue, more and more projects have started to build on the Layer 2 solutions that ensure lower costs for transactions. On the other hand, computing on Layer 2 involves trade-offs, as decentralization and security might suffer.
As we've established in this article, a blockchain network can easily choke up with bottlenecks as more participants join in and the quantity of transactions increases. These bottlenecks can refer to hardware limitations, expensive transaction fees, or lengthy response times for transaction validation. The Bitcoin network seems to be riddled with such issues, but many bright minds work continuously on improving it with different scalability solutions.
While there are quite a lot of factors that negatively impact scalability, there are also many developing solutions for the blockchain scalability trilemma. Both Layer 1 and Layer 2 scalability solutions are trying to solve different problems that blockchain networks face. On-chain solutions include consensus protocol improvements, Segwit, and sharding, while off-chain solutions encompass nested blockchains, payment channels, and sidechains. There is still more work to be done before we reach the point of a high-performing blockchain platform that supports thousands of transactions per second while also having lock-tight security.
The crypto community is working non-stop to come up with innovative ideas and methods to improve blockchain scalability and efficiency. We're confident that lack of scalability will become a thing of the past as more Layer-1 and Layer-2 options emerge.
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