A Deep Dive Into Blockchain Scalability

We dive deep into promising blockchain developments that might allow for achieving near-instant cryptocurrency transaction speeds.

Key Takeaways:

• Blockchain scalability refers to the ability of a blockchain network to handle an increasing amount of transactions and data without compromising performance, security, or decentralisation.

• Throughput, finality, and confirmation time are the three main bottlenecks for a blockchain’s scalability. The solutions proposed are all aimed at tackling these.

• The blockchain scalability trilemma (scalability, decentralisation, security) might be a tricky problem to solve, but it is not something set in stone.

• Three directions that blockchains are heading towards in order to boost their scalability include novel consensus mechanisms and both on-chain and off-chain solutions.

Introduction

Blockchain scalability is arguably the holy grail and bottleneck of the cryptocurrency world. It mainly refers to transaction speeds, as the current transaction times of many cryptocurrencies don’t compare to other payment methods. However, crypto communities are working with different theories on how best to overcome this hurdle. In this piece, we dive deep into the promising developments that might finally bring near-instant transaction speeds to cryptocurrencies.

Why Scalability Matters: Cryptocurrency Transaction Speeds

While Visa can process up to 24,000 transactions per second (TPS), Bitcoin can process only seven TPS. Ethereum, Bitcoin’s closest competitor, can handle 20 to 30 TPS. It’s clear that cryptocurrencies must catch up with traditional finance’s transaction capabilities in order to achieve mass adoption.

But why is scalability so difficult on a blockchain? What are some directions those in the industry are hearing? This article answers those questions and more.

Bottlenecks: Throughput, Finality, and Confirmation Time

How is TPS related to processing speed? What exactly does it mean when it is asked if a cryptocurrency is scalable? To answer those questions, we first need to understand the concepts of throughput, finality, and confirmation time.

Consider this story:

A person is waiting for a bus that comes every 10 minutes. It then takes 60 minutes for the bus to take them to their destination. However, this particular route is popular, and there are always plenty of people trying to board the bus.

Two minutes have passed, and the bus has arrived. Unfortunately, there are too many people ahead of this person in the queue and the bus is filled. They now need to wait for another 10 minutes before they can begin their journey, which can be summarised like this:

It should be noted that:

• Measuring throughput (TPS) is not enough — confirmation time must also be considered. Simply put, a protocol that can process up to 100,000 TPS is great. However, if it has a two-day confirmation time, that will not suffice for daily use.
• When there is network congestion, throughput does not decrease (since the bus can still carry seven passengers per minute), but the confirmation time increases because of the longer average first block waiting time.
• Finality is fixed: There is a ‘six blocks confirmation’ wait to ensure that the block is not reversible. The average first-block waiting time varies depending on the situation.

The Blockchain Scalability Trilemma

The blockchain scalability trilemma is one of the greatest hurdles for cryptocurrency. It states that blockchains can only simultaneously achieve two out of either decentralisation, scalability, or security — but never all three. Therefore, trade-offs are inevitable. The trilemma was originally coined by Vitalik Buterin, the founder of Ethereum.

However, the scalability trilemma is not set in stone, as it is an observation from Buterin and Web3 communities. Despite how difficult it is to solve the trilemma, an algorithm may exist…unless someone has proven it is impossible.

1) Decentralisation

Decentralisation refers to the degree of diversification in ownership, influence, and value on a blockchain. Cryptocurrencies are generally decentralised since no single party can govern the whole network. However, decentralisation is a spectrum rather than a binary ‘yes or no’, as there are different levels of decentralisation across various blockchain projects, including Bitcoin and Ethereum.

2) Security

Security is the level of defensibility and resistance to tampering a blockchain has against attacks from external sources. There are many attack vectors in a blockchain system, including double-spending, distributed denial-of-service (DDoS), and 51% attacks.

In general, greater freedom (i.e., free entrance to/exit from the network) results in higher decentralisation but lower security. That’s because it’s hard to verify the identity of new participants, where they could potentially either be owned by a single malicious entity or collude together to cause harm to a network.

3) Scalability

Scalability determines the network’s capacity, including the number of nodes it has, how many transactions it can process, and how quickly it can process them, amongst other factors.

The term scalability is sometimes confusing because Bitcoin’s blockchain is scalable upon new participants joining the network. The Proof of Work (PoW) system automatically adjusts the difficulty of mining, and the network can tolerate any number of nodes that exist within it.

The common saying that ‘Bitcoin is not scalable’ is focused on its throughput. Remember, its TPS is only seven, which is not high enough for practical use. The finality speed of Bitcoin is another issue. Waiting for 60 minutes to confirm that a purchase is valid is definitely far from ideal.

Ramping Up Blockchain Scalability

Scaling a blockchain is complicated, and there are numerous efforts from researchers and businesses to solve the trilemma. In general, we believe there are three directions for blockchain scalability:

• Layer-1 (on-chain)
• Layer-2 (off-chain)
• Other consensus mechanisms

Layer-1 (On-Chain) Solutions

Layer-1 solutions require changing the codebase of the blockchain (hence, ‘on-chain’). An on-chain scalability solution represents a structural or fundamental change for a blockchain. Here, we discuss two on-chain scaling solutions: SegWit and sharding.

Segregated Witness (SegWit)

SegWit is a protocol upgrade for Bitcoin that changes the way and structure of how data is stored. The original intention of SegWit was to solve the transaction malleability problem, as the digital signature that verifies the ownership and availability of the sender’s funds takes up a lot of space in a transaction.

With SegWit, removing the signature data for each transaction releases more space and capacity for transactions to be contained in Bitcoin’s 1 MB storage blocks, allowing more transactions to be included in one block. SegWit has already been implemented in Litecoin.

Although SegWit increases the throughput and helps Bitcoin process more transactions, it is not a sustainable scaling solution. It is not a generic scaling solution, and can only be applied to the one Bitcoin-based blockchain that exists. Though SegWit enables Bitcoin to process more transactions, it does not reduce the confirmation time for each transaction.

Sharding

Sharding is a form of database partitioning, also known as horizontal partitioning. It is a process of breaking up a vast database into smaller and more manageable segments, with the idea of improving performance and reducing the query response time.

Blockchain is a distributed database, and if we apply sharding to a blockchain, then the network is divided into different segments. Each segment is governed by certain nodes that have been allocated to them. Because of this, the throughput of the system is greatly improved since, arbitrarily, many node clusters are running in parallel to process the transactions.

Layer-2 (Off-Chain) Solutions

Layer-2 scalability solutions, or off-chain solutions, add a second layer to the main blockchain (also known as the mainchain) network to facilitate faster transactions. The secondary protocols are built on top of the mainchain, where transactions are ‘offloaded’ to save space and reduce network congestion.

Sidechains

A sidechain is a separate blockchain linked to the mainchain, where assets are traded between the mainchain and sidechains at predetermined rates using a two-way peg. Sidechains are used for offloading from the mainchain by moving certain applications to them; they are amongst the most promising solutions to the scalability problem if inter-blockchain communication becomes more efficient.

Multiple sidechains can be attached to the mainchain, and each sidechain can have its own architecture. A network of sidechains with a mainchain can be created, where the mainchain acts as a relay network and the sidechains represent a blockchain network. Plasma (Ethereum) and Parachain (Polkadot) are popular scaling solutions using sidechains and relays.

Payment Channels

A payment channel is an off-chain network that runs parallel to the mainchain. The idea is to establish a channel between two parties who want to transact.

All transactions that take place within the channel are off-chain, and global consensus is not required. As a result, these transactions execute quickly via a smart contract, generally with lower fees. A typical payment channel includes three phases:

Phase one: Establishing the channel by signing and funding it.

Phase two: Peer-to-peer (P2P) transactions occurring in the channel.

Phase three: The channel is closed and the final state of the mainchain is broadcast.

There are several different designs for payment channels. Lightning Network (Bitcoin) and Raiden Network (Ethereum) are popular payment channel implementations.

Consensus Mechanisms and Why They Matter for Transaction Speed

The difficulty of scaling a blockchain is mainly due to its consensus mechanism since it requires all participants in the network to agree on which transactions are valid. While Bitcoin can scale to a large number of participants (nodes), it cannot scale to a large number of transactions. 

Thus, some alternative consensus mechanisms have emerged as attempts to solve the problem. We introduce three below: Nakamoto, Classical, and Leaderless.

Nakamoto Consensus Mechanisms

Satoshi Nakamoto’s PoW consensus mechanism opened up a new direction for solving the Byzantine Generals Problem in a permissionless setup. Following the development of the PoW consensus mechanism, many new consensus algorithms emerged. These include Proof of Stake (PoS), Proof of Authority (PoA), Proof of Reputation (PoR), and Proof of Importance (PoI).

In general, these are categorised as Nakamoto consensus mechanisms.

Classical Consensus Mechanisms

Classical consensus mechanisms are the traditional algorithms that have been researched before the invention of Bitcoin. They focus on fixed peer sets with multiple rounds of voting in order to reach a consensus within the whole network. Examples of networks using classical consensus mechanisms include Paxos, Raft, and pBFT.

After the invention of Bitcoin, classical consensus mechanisms evolved, as well, with new variations like delegated BFT (dBFT), federated BFT (fBFT), Tendermint, and more. These mechanisms are more adaptive to a permissionless environment.

Leaderless Consensus Mechanisms

Both traditional (BFT-like) and Nakamoto (PoW-like) consensus mechanisms are leader-based, requiring the entire network to elect a leader for block proposals, transactions, ledger states, and more before the rest of the network can vote on whether or not to agree on the proposal.

However, there is an emerging direction using leaderless consensus mechanisms, where all participants in the network are allowed to bring up recent transactions, which are then spread like gossip across the network. Eventually, the blockchain decides on a consensus on which transactions to include. Examples of projects using a leaderless consensus mechanism include Avalanche, IOTA, and NKN.

While leaderless consensus mechanisms seem to provide a path forward for solving the scalability trilemma, most are currently experimental.

For a more in-depth discussion on the underlying principles of consensus mechanisms, read How to Agree: Different Types of Consensus for Blockchain.

Final Words on Scaling Solutions

Despite major hurdles for blockchain to still navigate, namely the scalability trilemma, there are several potential solutions to boost transaction times, including sharding and the Lightning Network, in addition to those being proposed by the community. For further reading, check out our deep dives into sidechains and consensus mechanisms.

Due Diligence and Do Your Own Research

All examples listed in this article are for informational purposes only. You should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained herein shall constitute a solicitation, recommendation, endorsement, or offer by Crypto.com to invest, buy, or sell any coins, tokens, or other crypto assets.

Past performance is not a guarantee or predictor of future performance. The value of crypto assets can increase or decrease, and you could lose all or a substantial amount of your purchase price. When assessing a crypto asset, it’s essential for you to do your research and due diligence to make the best possible judgement, as any purchases shall be your sole responsibility.