As blockchain technology continues to establish itself as a new cornerstone of the global economy, its decentralized network architecture faces a unique problem known as the Blockchain Trilemma (which comprises decentralization, security, and scalability).
“Blockchain decentralization” refers to the meaningful distribution of processing power and consensus across a network. Security, on the other hand, refers to a blockchain protocol’s defences against malicious actors and network attacks. Both are considered non-negotiable requirements for the operation of a blockchain network.
Scalability is critical because it is the only option through which blockchain networks can compete with centralized systems with short settlement times. The Bitcoin network can handle 4–7 transactions per second. VISA, on the other hand, handles approximately 1,700 TPS. Blockchain technology must meet or exceed these high scalability standards to compete with these existing systems.
Fortunately, a new generation of blockchains and scaling solutions specifically built to address this transaction-capacity issue are rapidly developing and making significant progress. We’ll examine these solutions in this guide.
What is the Issue With Blockchain Scalability?
The incapacity of public blockchains to scale prevents organizations and industries from obtaining relevant solutions. Many internet transactions between individuals or businesses rely on a centralized infrastructure (or are controlled by a third-party organization). In executing a digital payment between two entities, a bank or credit card issuer may, for example, function as a third-party corporation. The third-party seller charges a fee for each successful transaction.
In a consolidated manner, the third-party controls and manages virtually all of the information of the stakeholders involved in the online transaction. This approach requires the involvement of a third party to ensure the transaction’s security. On the other hand, blockchains are distributed ledgers of cryptographically signed transactions managed by a peer-to-peer network. There is no requirement for a third party to manage the data, and network participants are not required to trust one another.
In many real-world commercial circumstances, scalability has been identified as the most significant hurdle to establishing public blockchains. The scalability issue with blockchain becomes apparent as the number of nodes and transactions increases. This issue arises because each node in Bitcoin and Ethereum must store and conduct a computational activity to validate each transaction.
As a result, public blockchains require a lot of computing power, high-speed internet access, and a lot of storage space. Transaction throughput and latency are the two blockchain performance metrics that people argue about the most, and neither has reached a satisfactory Quality-of-Service (QoS) level in many of the public blockchains that have emerged in the past few years.
Existing Blockchain Scalability Options
Scalability is the most significant impediment to widespread blockchain adoption; hence effective blockchain scaling solutions are required. Various solutions are currently being developed to address the issue of blockchain scalability. Here are a few approaches to solving blockchain scalability issues:
Layer-1 Scaling Solutions
A Layer-1 solution is helpful because it doesn’t require any additional infrastructure. Improving the protocol itself may help scale a Layer-1 blockchain. The two most popular Layer-1 scaling methods are consensus-level protocol updates and sharding.
Sharding is a well-known on-chain scalability solution. It focuses on sharding the blockchain network into smaller, more manageable chunks. The shards would then run concurrently on the network.
Sharding eliminates the risk that the speed of individual nodes will impede transaction speeds. If each shard accepted a card of transaction processing from the group, the network’s processing output would increase significantly. If the network is broken down into smaller fragments, it can function as the sum of its parts.
Segregated Witness (SEGWIT)
SEGWIT is a Bitcoin blockchain network protocol enhancement aimed at changing the method and structure of data storage. It helps in the removal of signature data from each transaction. This increases storage and transaction capacity. It’s worth noting that a transaction’s digital signature, which verifies the sender’s ownership and availability of funds, takes up roughly 70% of the total area. The removal of the digital signature may allow for the addition of more transactions.
While Layer-1 blockchain scalability solutions require hard forking, the most effective option is a contentious hard fork. A hard fork is a procedure that involves making structural or fundamental modifications to a blockchain network’s properties. It may entail increasing block sizes or reducing the time required to create a block.
The contentious hard fork effectively creates a schism in the larger blockchain community, with a section of the community opposing the core on specific concerns. In these situations, a blockchain community member can choose to modify the source’s structure.
Layer-2 Scaling Solutions
Layer-2 scaling solutions developed on top of existing blockchain systems. The primary goal of these protocols is to address transaction speed and scaling concerns in networks. Higher throughput is required before these networks can be widely accepted and deployed. For example, Bitcoin and Ethereum can now not process thousands of transactions per second (TPS), limiting their long-term growth and adoption.
Layer-2 solutions do not require structural changes to the main chain because they serve as an additional layer on top of the base layer (Layer-1). As a result, a Layer-2 solution incorporating main chain security can provide high throughput. The following are some examples of Layer-2 -scaling solutions:
State channels, using various approaches, facilitate two-way communication between blockchain networks and off-chain transactions. As a result, transaction speed and capacity can be significantly increased. It’s worth noting that state channels don’t need miners to validate transactions instantly.
State channels function as network resources that are integrated using a smart contract or a multi-signature technique. The relevant blockchain records the final “state” of the “channel” and all related transitions when a transaction or series of transactions on a state channel are completed.
The Ethereum Raiden Network, the Liquid Network, Celer, and Bitcoin Lightning are excellent examples of how state channels can be leveraged to make blockchains more scalable.
In the case of big batch transactions, the sidechain serves as a transactional chain that operates concurrently with the blockchain. In contrast to the original chain, they rely on independent consensus mechanisms. Surprisingly, the unique consensus mechanisms provide opportunities for scalability and performance improvement.
Most sidechains’ mechanisms for transmitting data between the sidechain and the main chain involve utility tokens. In this situation, the main chain’s essential duty is to ensure overall security while assisting with dispute settlement. Also, it’s vital to know that sidechains and state channels can be distinguished in many ways.
Plasma uses child chains that begin with the main blockchain and operate as an independent blockchain. The child chains handle their transactions while benefiting from the main chain’s security. The parallel operation of each child chain allows for maximum speed and efficiency. In addition, each child chain may have its own characteristics and rules.
The Lightning Network uses private, off-chain channels to leverage smart contract functionality over the main blockchain network. Off-chain channels could allow faster and cheaper transactions. The Lightning Network, in particular, reduces the strain on the main blockchain by rerouting transactions away from it. As a result, users no longer have to pay mining fees or wait for block confirmation.
Scalable Consensus Mechanisms
Scalable consensus mechanisms can improve scalability and transaction throughput. Here are some well-known scalable consensus mechanisms that can aid in scaling blockchain networks:
DPOS (Delegated Proof-of-Stake) is a consensus mechanism that allows token holders to select validators for network transactions.
The number of delegated validators might range between 10 and 100 and is updated regularly. Token holders can easily vote out underperforming validators or those maliciously working against the system.
Participants in a Proof-of-Authority-based blockchain system are required to stake their identities. The Proof-of-Authority consensus mechanism places selected nodes in charge of validating transactions in the network. The nodes act as system administrators, dictating the status of blockchain transactions. It is a scalable consensus mechanism using a reputation-based consensus algorithm.
Byzantine Fault Tolerance (BFT)
BFT-based consensus mechanisms have proven to be one of the most reliable solutions to the Byzantine Generals’ Problem. BFT is a distributed system feature that requires constant consensus even when multiple adversarial agents exist in the network. Many Byzantine Fault Tolerance algorithms have been identified as valuable solutions for blockchain scalability.
Scalable Distributed Ledgers
Blockchain is a subset of distributed ledger technology (DLT). This implies that other distributed ledgers also exist. A prominent example of a distributed ledger that helps in scaling blockchain solutions is Directed Acyclic Graphs (DAGs).
The Future of Blockchain Transactions
Faster blockchain transactions lead to greater adoption and more real-world applications, which we’ve been hoping for since 2017.
DeFi has already established itself as a major player in the blockchain industry. More DeFi use cases, such as cross-border payments, faster remittances, and so on, are expected to emerge as scalability improves.
Advancements in blockchain technology are projected to have a significant impact on the supply chain and logistics industries. Another industry where blockchain is increasingly utilized is identity management.
More scalable solutions should make integrating blockchain into our daily lives easier. Needless to say, this is only a fraction of the potential applications of blockchain technology.
- Significant scalability issues have arisen due to the growing demand for blockchain applications. An increase in participants and transactions may hamper a blockchain network’s ability to execute transactions seamlessly.
- While various factors can affect blockchain scalability, the large number of blockchain scalability solutions available provides much-needed relief.
- The rapid development of scaling solutions gives us hope that blockchain will not only be around for a long time but will also change the world.
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