Bitcoin is slow by design Blockchains were not necessarily built for speed.Satoshi designed bitcoin with security and decentralization top of mind, and acknowledged that the system would struggle versus centralized competitors such as the major credit card networks.Instead, bitcoin’s ten minute block times and small block sizes have helped preserve consensus of the global, leaderless network by reducing the frequency of unintentional ledger forks and keeping node operator costs and storage requirements low.Bitcoin is slow: it has processed fewer than four transactions per second (tps) over the past calendar year.And bitcoin cannot scale its throughput very easily as was evident in the multi-year governance battle around “block size”, which culminated with the network’s first major hard fork, bitcoin cash in late 2017.The hard line on constraining bitcoin’s blocksize led to the dominance of the “digital gold” narrative ever since.Most investors today seem content with bitcoin’s role as a low-throughput system, and prioritize its strong settlement assurances for high-value transactions over support for a global payments network.It’s easy to see why! The equation of exchange suggests that an increase in velocity, the rate at which funds are exchanged, places downward pressure on price.
How about Ethereum? A similar narrative is now emerging within Ethereum .The “world computer” project is triangulating on higher-value transaction settlement vs.high-throughput distributed applications.In short, Ethereum is all about DeFi now.This shift was born of necessity.As Ethereum rose in popularity throughout 2017, its subdued processing capabilities (about 7.5 tps on average) could not keep up with the rapid increase in transaction volume.A backlog of unconfirmed transactions caused a spike in transaction fees and slowed settlement times down further, making Ethereum an inadequate platform to support the needs of specific gaming applications and exchanges.The most notable example was the CryptoKitties crisis, an on-chain collectibles game that infamously brought Ethereum to a near halt shortly after the game launched in late 2017.
In response, blockchain-based games and gambling applications are opting to build on more performant and fee-friendly smart contract platforms like EOS or Tron.Even the prolific team from Dapper Labs, the creators CryptoKitties, raised $11 million to build a competing network void of the transaction bottlenecks plaguing Ethereum.Bitcoin evolved from payments to settlement when it ran into scaling issues.Ethereum has moved from a world computer to DeFi amidst the same set of challenges.
It would seem next-generation blockchain projects shouldn’t ignore the obvious: the general lack of capacity for high-throughput crypto applications opens up opportunities.But who will solve the user experience and incentive alignment issues.In the short term, the solution may lie in either convincing customers non-custodial financial and data services is preferable to the status quo (a behavioral shift), or providing an environment that rivals existing systems in performance (a technical advancement).A shift in consumer behavior takes time and education to achieve the desired results.
In our world of instant gratification (and the limited resource of time), this approach is inefficient.In response, most developers and investors opted instead to solve the technical problem of building scalable blockchain networks.Some High-Throughput Options_ An analysis of recently funded projects confirms that scalability is the preferred strategy to win user adoption.In our sample set, investors have shoveled over $2.4 billion into Ethereum alternatives that promote superior performance levels.
Yet, 75% of these “super-chains” have yet to launch, and other live systems have yet to deliver on their promise.The spending spree extends to “layer two” solutions as well.
These projects absorb some of the computation and data storage responsibilities from base layer networks, which receive a performance boost in terms of transactions processed per second and node operation costs.Investors in these second-layer solutions are betting blockchain networks will scale vertically rather than horizontally.
Despite the mass-capital injections, a scalable blockchain solution remains elusive.Therefore, the lingering question is with all this money allocated to research and development on blockchain scaling, what is preventing the emergence of a dominant solution? Mo scale mo problems Scaling a network based on decentralized infrastructure and a community of node operators is difficult because of a finicky relationship between decentralization, security, and scalability, sometimes referred to as the “Scalability Trilemma,” that prevents blockchain systems from featuring all three properties.All existing networks make tradeoffs.
Bitcoin and Ethereum elected to prioritize decentralization (low node operator costs) and security (high cost of attack) over scalability (high transactions per second).
Alternative options like Binance Chain restrict node access to optimize performance while sacrificing decentralization.Other alternatives sacrifice some network security.Since computational performance is a potential precursor to functionality and adoption, attempts to solve this trilemma offer important feedback as to what strategies provide the best opportunity to scale blockchain networks.Past projects often overlooked the relationship between the parameters that impact a network’s ability to scale.Beyond transactions per section, these factors include the number of validators, the cost of transactions, and the time to finality.Most early attempts at scalability were blunt attempts that attempted to tinker with one parameter without impacting the others.Bitcoin Cash and its Bitcoin SV fork altered the Bitcoin code to increase block size to include more transactions in each block.
The increase in tps came at the expense of decentralization, as the “upgrade” also spiked the data storage requirements for node operators.Both chains also promote their low transaction costs even though low fees decrease miner income and serve as a long-term existential threat to network security.An alternative attempt to curb operator cost is to place a strict limit on the number of validating nodes.This approach is commonplace in delegated Proof-of-Stake (DPoS) networks, such as EOS and Tron , where only a select number of nodes weld all of the voting power.Small validator sets enable the network to reach a consensus on transaction order and verification in a short period of time, but the system relinquishes the properties of decentralization and censorship resistance.The search for a more promising solution More promising layer-1 solutions recognize that the parameters to scalability listed above need to scale in a collective manner.
These approaches involve greater technical complexity, hence the extended time spent in research and development.
Some of these experiments include sharding, the separation of time and state, and interoperability.Projects such as Ethereum 2.0, Zilliqa , and NEAR are looking to adopt sharding to solve scaling woes.The sharding model segments the network into various groups (called shards), and nodes only have to validate transactions on their respective shard.This “divide and conquer” approach enables chain segments to process network transactions in parallel, thereby accelerating the rate of performance.Nodes are also only responsible for processing a small percentage of the total transactions in the network, which in turn lowers operator costs and preserves decentralization.Despite the upside, sharding is a highly difficult engineering problem, and its ability to maintain functionality under high levels of stress remains in question.While the Zilliqa mainnet features a live sharding architecture, the true test of sharding will come when Ethereum launches the final phase of Serenity.
On the other hand, Solana forgoes sharding in favor of separating time and blockchain state.Its network features an internal mechanism, called Proof-of-History (PoH), that synchronizes the order of transactions in real-time.PoH eliminates the need to reach a consensus on transaction ordering, a time-intensive ordeal, and enables nodes to process incoming transactions “as fast as they are received.” Like sharding, however, PoH is unprecedented and remains in active development.The team at Solana is also finding it difficult to achieve its desired upper limit for tps (about 40,000-50,000) during internal tests.
Solana will face a much greater challenge as it transitions from internal testing grounds to a public testnet.Another compelling scaling frontier is interoperability.Interoperable solutions act as intermediaries that facilitate the transfer of information between different Layer-1 networks.This cross-network connectivity could also enable various chains to leverage each other and outsource performance or security needs.
In a sense, Ethereum in its current state could ship processing responsibilities to a more performant chain, achieving scalability through the “parallelization of computing.” Networks on the receiving end would benefit from Ethereum’s level of security, token liquidity, and user base.While the thought of a cross-chain collaborative effort is encouraging and projects like Cosmos and Polkadot are progressing, the assumption interoperability can quell scaling concerns remains unfounded.All of these attempts to solve scalability at the base layer involve highly complex technical solutions.The complexity resides in the difficulty required to harmoniously coordinate the various parameters of a blockchain’s design (security, decentralization, cost of transactions, etc.) at scale.The daunting challenge led some projects to look up the stack for a viable alternative.Looking for an answer above Second layer solutions exist one layer above blockchain networks and often connect to an underlying platform via a two-way peg or a specialized smart contract.
These bi-directional pathways offer an outlet for base layers to offload some of the computational responsibilities and relieve any transaction congestion.Think of these layer-2 networks as pressure valves for high-volume, low-throughput blockchains.
While base layers receive a performance boost, the layer-1/layer-2 relationship is wholly synergistic: most second layer solutions rely on their underlying networks for security and dispute resolution.This dynamic allows for more flexibility in layer-2 design, as teams can trade security (and sometimes trust minimization) in favor of scalability without compromising decentralization at the base layer.The Lightning Network is the most prominent example.
It’s a system of payment channels built above the Bitcoin blockchain that enables users to transact in a low-fee, high-throughput environment.Users can settle their Lightning transaction records to Bitcoin periodically rather than submitting each transaction on-chain, which lessens the overall workload passing through the Bitcoin network.While the Lightning Network and similar projects (like state channels) are exciting concepts in theory, these projects are limited in scope: payment and state channels do little to facilitate the execution of smart contracts or more complex operations.In response, projects started exploring other layer-2 scaling solutions, namely sidechains and rollups.Sidechains are independent networks, often with a unique consensus layer, that link to a base layer protocol via a two-way peg.
Unburdened by layer-1 design, sidechains can support features beyond the capabilities of its base layer(s), including, but not limited to, scalability and interoperability, without reliance on layer-1 storage.Despite the proposed benefits, these offshoot networks require a greater amount of trust and coordination between participants, an uncomfortable proposition for the crypto faithful.This dilemma could explain the lack of demand for sidechains.Loom Network is trying to brute force adoption by plugging into multiple layer-1 networks (Ethereum and Tron now, and Binance Chain in the near future), hoping one of these efforts strikes gold.
Even the more well-traveled sidechains, like POA Network ’s xDai chain, rank significantly lower in terms of activity and daily active users compared to base layer applications.
A more compelling argument in favor of sidechains is if market demand for interoperability spikes, which would push users towards active second layer solutions since layer-1 interoperable protocols remain in development.On the flipside, rollups are receiving a lot of attention from the crypto elite, including Vitalik Buterin.Rollups are Ethereum-based smart contracts that manage cross-layer transfers between sidechains and layer-1 networks.Unlike the two-way peg mechanism employed by most sidechains, rollup contracts bundle (or “roll up”) numerous state changes consisting of thousands of transactions into a single block before publishing to the base layer.This method provides a cheaper alternative to on-chain data storage and computation.
Rollups also branch off into two flavors: ZK Rollups and Optimistic Rollups.
At a high level, ZK Rollups use the cryptographic magic of zk-SNARKS to automatically verify each new transaction block.Optimistic Rollups bypass this mathematical roadblock (SNARKs are expensive and difficult to implement), but operators and users can backcheck published states and revert a block if deemed invalid.Both options are still early in development and need to overcome challenges in security (rollups consist of a single contract, thus an attractive honeypot for attacks) and time to finality to be considered viable solutions.The harsh reality facing scaling solutions It’s still early.Every new technology described above will require time to develop, debug, and improve.
The harsh reality is the best technology to emerge in blockchain scaling may not win.As Dan Zuller points out, “there are social and economic components as well that will determine the eventual winner or winners.” This sentiment heavily favors blockchain networks like Bitcoin and Ethereum, as they hold a notable advantage in utility, transaction volume, developer, and stakeholder communities.The network effects that govern these components will continue to accrue value and demand for more robust and seasoned blockchains.Therefore, scaling solutions that build off of more popular base layers will have a greater impact on adoption and see greater demand in return.The remaining question is: where does this leave Ethereum? If delays continue to plague its uphill battle to scale the network, will users and projects migrate to competing chains en masse? In the short term, probably not.Ethereum built enough of a moat through its DeFi sector and diverse community of stakeholders to prevent losing significant ground.The advent of second-layer solutions, in particular, rollup contracts, could alleviate Ethereum’s near-term performance concerns and provide an adequate buffer until Ethereum 2.0 is ready for mainnet.The lack of adoption on “high-performance” blockchains confirms scalability is not the defining feature that will attract users.
It’s a marketing term (and an effective one) to raise funds at outrageous pre-product valuations.But it’s value accretive for dominant chains; scalability solutions expand functionality for existing verticals like DeFi, enabling applications to address a wider range of use cases and attract a larger user base.This is a companion discussion topic for the original entry at https://messari.io/article/a-guide-to-scalability.
