Last updated on July 9th, 2023 at 06:56 pm
Bitcoin is the most popular cryptocurrency, and its popularity has grown in recent years. Traditional financial institutions are adopting cryptocurrency and implementing various strategies to allow their clients to benefit from its services. The concept has evolved beyond a payment system to having innovative infrastructures built around it. For instance, Jack Dorsey, the founder and former CEO of Twitter, resigned to focus on Square, a digital payment company that is developing innovations centered on Bitcoin and other smart payment systems.
Notable financial companies, such as Goldman Sachs, have expressed interest in Bitcoin and what it has to offer. Countries such as Russia and El Salvador are actively developing regulations to encourage residents to use Bitcoin.
Bitcoin’s Scaling Problem
Bitcoin has a scaling problem when compared with traditional payment methods, as well as new generation cryptocurrencies. Its transaction speed is slower than traditional payment platforms like VISA. As the demand for Bitcoin and Ethereum increases, their network has become clogged, facing processing issues and delays, defeating the purpose of swift transactions.
At the moment, there has been an increase in calls for both networks to scale and improve their capacity to handle more transactions quickly.
Ethereum is moving to Proof of Stake in the future as a way of scaling and reducing gas fees, as well as heightening transaction speed. While, to scale, Bitcoin has had to consider two core elements. Firstly, it has to improve its speed and capacity, without sacrificing security. Secondly, the incentivization of miners is also important for the operation of the network. The network has to find the right balance.
For the Bitcoin network to work effectively, it has to be expanded in such a way to allow increasing transactions and users.
What is blockchain scaling?
Blockchain scaling is the process of improving a blockchain’s operations, which can be evident in transaction speed, node strength, and gas fees. It works in two ways: horizontal scaling and vertical scaling.
Horizontal scaling entails incorporating more machines into an architecture, hence increasing throughput. Vertically scaling a blockchain entails adding more memory and power to each node in the system, resulting in more efficient nodes.
With Bitcoin’s rapid adoption and the intricacies of its network, it is difficult for one scaling technique to have a significant impact on it.
On-chain scaling tools and off-chain scaling solutions can also be used to scale blockchains. On-chain scaling solutions increase the network’s base layer, but off-chain tools use another protocol to improve the functioning of a blockchain.
Scaling an existing blockchain with on-chain solutions may be ineffective because it focuses on improving the base layer, which has little effect. Off-chain scaling methods are considered to be superior for an existing network such as Bitcoin.
On-Chain
When an on-chain solution is used to scale a network, it focuses on improving the operations or throughput of the base layer. It could involve changing the block size to improve the verification speed of transactions. Segregated Witness or SegWit is an example of an on-chain scaling solution. With this feature, the size of transactions on the Bitcoin network is reduced.
On-chain scaling may come in the form of creating a new chain with a different consensus system interested in offering scalable transactions while sacrificing other elements like decentralization. An example of this is the plan of Ethereum to move from Proof of Work to Proof of Stake.
Common on-chain scaling solutions will be discussed below.
- SegWit
SegWit, or Segregated Witness, improves a network’s block size restriction by removing the signature data from each transaction in the blocks. As some aspects of a transaction are removed, the structure of data storage is improved, offering more capacity to incorporate extra transactions in the network.
A digital signature occupies a large part of a transaction’s storage capacity, therefore removing it frees up more space.
- Sharding
Sharding is a process where a network is divided into smaller sections that are called shards, making it easy to manage them. These shards work independently of each other, allowing every section to validate different transactions, thereby improving outputs.
- Hard Forks
Blockchains can change their structure and base layer through the hard fork process. Some networks were created through this process from Bitcoin. Some wanted to improve the size of the block or reduce transaction time.
Hard forks usually lead to a network splitting into different parts and schools of thought. Some community members may be against the fork, while others may support it. Similar tales have played out in Bitcoin and Ethereum.
Off-Chain
Another way to scale a blockchain is via off-chain solutions. This involves creating a different protocol that works with the blockchain. Most times, they work on the blockchain. They are different from the network and usually possess a layered feature. An example of an off-chain scaling feature is the Lightning Network. Like other off-chain scaling solutions, the Bitcoin Lightning Network makes transactions fast and cheap but does not possess the security architecture of the base network. The risks of transactions being compromised on an off-chain protocol are higher than those verified on-chain.
- Sidechains
Sidechains are fast becoming a common scaling solution for blockchains such as Ethereum. They are designed to solve scalability issues in main chains. Polygon, for example, began as a Scalability solution for Ethereum before expanding to cover other aspects. While optimizing speed and scalability, this scaling solution is independent of the main chain.
Although side chains can improve the performance of the main chain, they do not possess the same security mechanism. Polygon, for example, is a scaling network for Ethereum, but it is independent of it, especially in its security architecture.
- Plasma
Plasma is a Layer-2 scaling architecture that uses child chains that branch off the parent chain. Each child chain operates independently of the others, executing transactions and reducing the load on the main network.
The general network’s speed and efficiency improve when each child chain verifies different transactions. Although child chains are independent blockchains, they benefit from the original chain’s security mechanism. They may have varying features and guidelines because they are independent sections.
Possibility of Layered Scaling Solutions
- Lightning Network
Lightning Network leverages smart contracts features on the main network by using off-chain structures. With the help of these structures, transactions are verified swiftly and cheaply. Lightning Networks are designed to reduce the transaction volumes on the main blockchain. Compared to Bitcoin blockchain, this off-chain structure is fairly new, which implies that there is a lot that has to be uncovered before it can be considered a suitable off-chain scaling method.
- The Liquid Network
Liquid Network is a side chain network that improves the speed, transacting cost, and privacy of Bitcoin transactions.
Usually, Bitcoin transfers on Liquid are settled within two minutes, thereby reducing the problem of waiting for an uncertain confirmation time.
Liquid Network has evolved from being a sidechain network to an ecosystem that allows users to release new digital assets like security tokens or even stable coins.
Every asset issued on Liquid Network is native to it, ensuring that transactions are scalable, fast, and affordable. L-BTC or Liquid Bitcoin is backed by bitcoin to a ratio of 1 to 1, with its infrastructure designed to allow people to use a peg-in to move the bitcoin on the side chain.
What Happens If Nothing Changes?
Different scaling solutions are available to improve the functioning of Bitcoin, and they have their perks, as well as potential risks. If nothing is done to improve the scalability of the Bitcoin network, it could lead to slower transaction speed and higher costs, which may be afforded by only a few.
People may have to seek alternatives if they can’t cope with the slow throughput and astronomically high transaction costs.
In Conclusion,
- Bitcoin’s massive adoption is resulting in congestion.
- It has a scalability problem, which can be solved by on-chain and off-chain scaling solutions.
- Several scaling options may have to be used on the Bitcoin network.
- Popular on-chain scaling solutions are SegWit, sharding, and hard forks.
- If nothing is done, the Bitcoin network may suffer severe consequences.
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