Blockchain Scaling Explained

Scaling is one of the most debated topics in the cryptocurrency and blockchain industry.

Depending on their design, the blockchains forming the backbone of digital currencies can store data in a highly secure manner while not relying on some central authority to update them. It’s these two qualities that make the technology unlike anything to exist before it, as well as being potentially revolutionary.

However, when blockchains are optimised for such security and decentralization, adding new data takes a long time. By contrast, blockchains optimised for speed allow new blocks of data to be added much faster. So far, however, this increased performance always comes at the cost of decentralization and/or security. Ethereum co-founder Vitalik Buterin coined the phrase “blockchain trilemma” to describe these trade-offs.

Blockchain Scaling Explained

Existing Efforts to Scale Blockchains

Scaling blockchains effectively is all about increasing the total number of users that can use a network without compromising on the potentially world-changing qualities of the underlying blockchain technology. Different cryptocurrency networks approach the scaling issue in different ways. Thus far, however, none have succeeded in creating a blockchain that can serve the masses while still retaining both immaculate security and decentralisation.

Efforts to increase the performance of blockchain networks fall into two broad categories – on-chain scaling and off-chain scaling.

On-Chain Scaling

Also known as layer one or base layer scaling, on-chain scaling is all about changing elements of the blockchain itself to allow larger amounts of data to be stored in less time. Cryptocurrencies like Bitcoin Cash (BCH), Litecoin (LTC), XRP, EOS, and many others all attempt to solve the scalability issue at the base layer. So too do efforts like Bitcoin’s SegWit.

Different attempts to scale blockchains at the base layer include:

  • Increasing the maximum size each block of transactions can be. Bitcoin Cash (BCH) and Bitcoin SV (BSV) are both cryptocurrencies that attempt to scale using larger blocks.
  • Decreasing the time between adding new blocks to the chain. Litecoin (LTC), Ethereum (ETH), and many other post-Bitcoin blockchains have shorter block times than BTC.
  • Reducing the memory demands of transactions. The scaling upgrade added to Bitcoin (BTC) known as SegWit reduced the amount of transaction data that needed recording to the blockchain to allow more transactions to be added in every block.
  • Changing the consensus mechanism. Different consensus mechanisms provide different trade-offs between speed, decentralization, and security.
  • Redesigning the blockchain’s structure entirely. An example of this is sharding, which breaks up the blockchain into smaller pieces with different groups of nodes assigned to each partition. Ethereum 2.0 incorporated sharding, and many are optimistic that it will, in theory, allow the network to scale dramatically.

Although each of the above methods does indeed allow blockchains to process and confirm a greater number of transactions per second and, therefore, serve a larger user base, they all have their downsides.

The drawbacks of some methods, like increasing the block size, are easy to understand. Larger blocks demand more powerful and increasingly expensive hardware. This limits the number of people that can afford to run the equipment needed to secure the network.

Meanwhile, efforts like SegWit, for example, might not introduce centralization or security risks but their impact on speed and total transactions per second possible are negligible. Even with 100% of Bitcoin users transacting to and from SegWit addresses, the increase in network capacity is fairly small. Bitcoin is still not challenging the likes of completely centralized payment networks like Visa or even cryptocurrency networks that have compromised on security and decentralization to achieve a high transaction per second count.

Since they’re still very much works in progress, efforts like sharding introduce a variety of other issues. By dramatically increasing the complexity of the blockchain itself, new vulnerabilities and attack vectors are introduced. That’s why those developing Ethereum 2.0 are moving so slowly and still only expect sharding to become a feature in a few years’ time.

Finally, the use of alternate consensus mechanisms, like those of EOS or XRP, often limit the number of transaction validators. With a smaller group of validators, the cost of attacking a network significantly reduces. In fact, a coordinated effort by governments could likely shut down such cryptocurrencies if they ever became large enough to threaten national currencies, which many users hope they will.

Off-Chain Scaling

Clearly, scaling blockchains at the base layer isn’t easy. Every proposed solution has its own limitations or forces a compromise in terms of either decentralization or overall security. For this reason, blockchain developers are working on ways to allow more users to transact on a network without altering a blockchain’s fundamental structure. Such efforts to solve the issue of blockchain scaling are known as off-chain scaling solutions.

Bitcoin’s main value propositions are its scarcity, immutability, permissionless nature, and censorship resistance. These characteristics are protected by the security afforded by the world’s most powerful computer network. Such assurances of consistency have encouraged millions of retail investors, a growing list of institutions, and corporate treasurers like those at Microstrategy, Square, and other publicly-listed companies to trust the network as a store of value for hundreds of billions of dollars.

Understandably, Bitcoin developers aren’t willing to make any compromises on either decentralization or security. That’s why most discussions surrounding scaling solutions for Bitcoin focus on off-chain scaling.

Similarly, Ethereum is host to a growing number of decentralized financial applications. This has seen its usage exceed the network’s capacity in recent months. When there are more transactions than there is block space, both transaction fees and confirmation waiting times rise. This limits the utility of networks, meaning that only the wealthiest can afford to transact.

As mentioned, Ethereum has its own grand plan to scale its base layer. However, due to the complexity of sharding and other features of Ethereum 2.0, the upgrade is going to take a few years to complete. Hence, Ethereum developers are also exploring off-chain scaling solutions to reduce demand for block space.

As the name suggests, off-chain scaling involves conducting transactions away from the blockchain itself. By moving some transactions off the blockchain, demand for block space is reduced. Certain types of transactions are better suited to on-chain settlement. These include high value transactions that demand the utmost security. Meanwhile, other transactions probably don’t need the security of thousands of specialised computer systems. The example of buying a cup of coffee using Bitcoin fits into this category.

Different Approaches to Off-Chain Scaling

Although full explanations of the various off-chain scaling protocols is beyond the scope of this introduction to scaling, we’ve listed some of the more prominent ones below. We’ve also included the network they’re being developed for and a brief description of them:

  • Lightning Network (Bitcoin) – Bitcoin’s Lightning Network is a transaction protocol that uses payment channels to facilitate incredibly fast payments of any size at a fraction of the cost of an onchain transaction.
  • Rollups (Ethereum) – groups of transactions put together off-chain within a smart contract. There are different varieties of Rollups including Optimistic Rollups and ZK Rollups.
  • Sidechains (Ethereum and Bitcoin) – Independent blockchains connected to a parent chain with a two-way peg. Examples include Blockstream’s Liquid Network (Bitcoin) and Skale (Ethereum)
  • Plasma (Ethereum) – a framework of secondary blockchains that only occasionally interact with the Ethereum blockchain. Each “child chain”, as they’re called, can be optimised for different use cases. Plasma chains are a bit like sidechains, only they sacrifice some functionality for additional security.
  • State channels (Ethereum) – a way of performing valid Ethereum transactions and other processes away from the blockchain. They’re kept secure by having the option to refer back to the main chain if they ever need to.

Scaling Blockchains: No Easy Solution!

As you can see from the sheer number of different potential scaling solutions proposed to date, increasing a blockchain’s overall capacity, and therefore utility, isn’t exactly simple. However, it’s also clear from the amount of development work going into scaling that it’s one of the biggest challenges facing the industry.

Although many newer blockchain-based cryptocurrencies claim to have found a solution to the problem, thus far, they all rely on making changes to the underlying blockchain. While these changes can result in radically faster transactions for the networks in question, they also reduce a blockchain’s overall security or increase centralization.

Ultimately, it’s up to the users themselves if speed of transactions is more important to them than decentralization and security. It’s, therefore, telling that the two networks that seem to take both decentralization and security the most seriously have the largest market capitalizations in the industry. Put simply, it’s not all about which blockchain can process the most number of transactions per second.

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