One of the biggest issues that crypto and blockchain are facing right now alongside regulations, security and adoption is scalability. With VISA and MasterCard offering thousands of TPS (Transactions per second), it is hard for blockchain and crypto to be named as a better alternative in terms of the speed of the transactions. Let’s begin formally with what scalability actually means and why is there a lot of chitter chatter around the crypto space relating to this.
What is scalability?
Imagine you have a letter to post urgently, but the post office takes 60 minutes to post 10 letters which are in the queue and you’re the 100th person to enter the post office. By simple math, your letter would be posted after 10 hours, till which time you’ll have to wait in the queue. Frustrating, right? The model would’ve worked if the number of people in the queue was small, but if the accuracy is not to be compromised, each letter would take time to post. Similar is the problem with transactions in crypto. The issue with crypto is that the number of transactions that can be made is very limited. Hence, the time taken by a transaction to complete is more than conventional centralized methods.
The major problems that give rise to the scalability issue are:
- The time required to reach consensus.
- The time required to add a transaction to a block.
- Limited block size.
Proof of work
The first two problems are directly linked to the widely used consensus algorithm, proof of work. In the case of Bitcoin, the Sha256 cryptographic puzzles are hard to break. A huge amount of computing power is required for miners to solve the puzzle and efficiently add the transaction to the block after reaching a consensus. With the passage of time, the supply of Bitcoin will face a shortage, and naturally, the price would go up while the cryptographic puzzles grow complex (Simple demand and supply rule) which would eventually increase the time to reach a consensus. Had there been an unlimited supply of the digital currencies, this wouldn’t have been an issue but for now, this algorithm is time and energy consuming. The founder of Logos network, Michael Zochowski believed that Proof of Work is an added load to the problem of scalability. He stated,
A PoW system is inherently limited by the consensus algorithm rather than by hardware performance. It has been mathematically proven that PoW cannot safely scale past 100 or so TPS.
Although proven to be one of the best algorithms in terms of blockchain security, immutability, and decentralization; the platform providers are willing to trade transaction speeds for the greater good, security. Increasing security sounds like a fair trade, but with mainstream adoption, Bitcoin would have to do better than the traditional 7 transactions per second.
The block size of Bitcoin was initially set to be 1MB. With a block size this small, a bitcoin block can only process so many transactions. Each block contains the history of blocks tied to it to form a chain. If the block size is to be increased significantly, the blockchains would become huge decentralized databases with TBs of data. Increasing block sizes may be one of the solutions for the scalability issue but the community is divided and a lot of debate is happening regarding this topic. If the block size is increased, the fork of BTC would be inevitable.
Blockchain scalability solutions
As scalability is termed to be one of the biggest issues of blockchain and crypto at the moment, there are a lot of technical layer 2 solutions that the community has found. A few are listed below:
Much like how sharding operates on conventional databases, in blockchain, shards of the blockchain are kept on nodes and not the entire blockchains. Each node would contain a part of the blockchain and would maintain it in a shared manner so as to maintain the decentralization of the network. This significant decrease in data storage would help with scalability.
By Lightning network, users can open off-chain transaction channels with one another on which they can transact desired amounts. After the transaction is completed, the channels can be closed. The communication is recorded as a transaction on blockchain and miners are rewarded after the channel is closed.
Much like Lightning network, Plasma is also an off-chain solution designed for Ethereum. The Ethereum’s main chain would have child chains which could have their own child chains. These child chains would be used to handle the more complex tasks of the blockchain and the resultant transactions of the smart contracts would be broadcast on to the main chain. This could help save a lot of time and money.
Other consensus algorithms
Deploying other consensus algorithms that do not involve complex cryptographic puzzles and instead, need other ways to reach a consensus might actually make the process a lot cheaper and time efficient. Although it sounds all positive in theory, there are trade offs of security and decentralization in practice if consensus algorithms other than PoW are used.