Blockchain technology is gaining traction from various industries and brands around the world. It has provided companies with a database-like structure that processes transactions without the need for a central authority. However, this technological advancement is still far from mass adoption. Why? The increasing number of nodes that operate the blockchain network has resulted in the blockchain scalability problem.
Scalability refers to the blockchain’s ability to handle high demand and increase transaction throughput and generally relates to transaction speed. Unfortunately, blockchains don’t have high transaction throughput in comparison with other traditional payment methods, and thus, if blockchain’s scalability problems don’t find an adequate solution, the digital ledger won’t gain widespread adoption.
Let’s have a deep dive at why is scalability important, what blockchain scalability’s problems are, and what are their possible solutions.
What Is Blockchain Scalability?
Scalability refers to a network’s ability to manage an increasing load of work. Blockchain scalability refers to how much a blockchain’s protocol can handle high demand and increase transaction speed rate accordingly. In another sense, it’s how much a blockchain’s performance can be stable and at a high rate even with widespread adoption.
Any enhancement in terms of blockchain throughput, latency, or cost per transaction is known as scaling, and thus, a blockchain that has these advanced parameters is referred to as a scalable blockchain.
Factors that define blockchain scalability include:
- Throughput: Throughput is the measure of how many actions can be performed within a specific time frame. In a blockchain sense, transaction throughput is the rate of how fast a blockchain can validate and add transactions, which is measured in Transaction Per Second (TPS). Bitcoin’s throughput for example is only 7 transactions per second.
- Network: Every transaction mined on the blockchain has to be broadcasted to the whole network of nodes operating the system. This process takes huge amounts of network resources alongside the delays in block confirmation. When there is network congestion, the confirmation time will increase.
- Cost and Capacity: Blockchains store large amounts of data. With the growth of blockchain’s traction, the amount of data will increase, and thus, each node will have to have adequate resources and capacity to store such huge amounts of information.
This is why it’s important to note that transaction throughput isn’t enough to measure a blockchain’s scalability. Blockchain’s confirmation time plays a major role in blockchain’s scalability. For instance, if there’s a blockchain protocol that can process 10,000 TPS but has a confirmation time of 1 day, it wouldn’t be that efficient.
Why Is Scalability Important?
Blockchain’s scalability will determine the network’s capacity for processing larger transaction throughput, and thus, scalability is critical for blockchain’s growth. There will be a time when blockchain will not be able to manage a large number of transactions, and thus, will not be able to cater to its increase in mainstream adoption.
For instance, Visa has a rate of 24,000 transactions per second. On the other hand, Bitcoin can process 7 TPS, and Ethereum has a rate of 20 TPS. The problem lies here is that traditional payment methods are still far superior, efficiency-wise, to the digital ledger. Cryptocurrencies must catch up to platforms like Visa’s capabilities in order to achieve mass adoption.
The Problem Facing Blockchain Scalability
Initially, blockchains were not made to scale for high demands. Blockchain technology was first introduced in the financial sector. However, the decentralization and high-security features of this new technology attracted many non-financial sectors. Therefore, scalability issues prevail when the number of nodes increases in a blockchain since each node has to verify each transaction.
For example, Bitcoin publishes one block of transactions every 10 minutes. However, the Bitcoin block can only hold so much number of transactions since each block size is only 1 MB. So, unprocessed transactions must wait 10 minutes before getting validated. Therefore, the more transactions there are, the higher the time of confirmation will be.
This creates a transaction fees war. People who conduct transactions must pay miners a transaction fee in order to get their transactions validated. In this case, miners will always try to include transactions with higher transaction fees, delaying the ones with low fees.
On the other hand, Ethereum doesn’t have a block size limit and has a fast block time of one block every 15 seconds. However, there is a limit on the cumulative transaction fees of each block. And again, blockchains fall into the hole of low throughput.
Factors Affecting Blockchain Scalability
So, what are the main issues that affect a blockchain’s scalability?
Block Size
Many controversies have surrounded the Bitcoin block size for being smaller or almost negligible to our modern data storage standards. How does having a block size limitation affect the blockchain? Well, it directly affects its scalability. The block size is one of the parameters that calculate the TPS of a certain blockchain.
The three factors needed to calculate the TPS of a certain blockchain are:
- The average transaction size
- The average block size
- The average block time
Response Time
Transactions conducted on a blockchain should be validated by miners. And thus, the more transactions there are, the more time it will take for a transaction to be verified. For example, the Bitcoin blockchain has a 10-minute interval between each block. During network congestion, the wait time will increase significantly.
And so, the evident problem of scalability here is the growing number of transactions and users. However, if blockchains cannot expand in terms of capacity to cater to the high demand, this technology will never become of everyday use.
Transaction Fees
Users are eager to pay high transaction fees in order to get miners to process their transactions. However, this affects the blockchain’s scalability by leaving a long trail of unprocessed transactions. Low-fee transactions will be then left in a long queue that will take a long time to get validated by the network.
This also creates a barrier for the blockchain to reach mass adoption, since the idea of paying high fees for miners to process a transaction is not that appealing to traditional users.
The Blockchain Trilemma
Another side of blockchain’s scalability issues is the blockchain trilemma. The blockchain trilemma is the belief that the blockchain cannot achieve decentralization, security, and scalability simultaneously, and thus, one element always has to be sacrificed for the other two to be achieved.
Scalability is almost always the parameter that gets sacrificed when developing a blockchain network. This is because security and decentralization are the ethos of Web3, and minimizing them will only result in a centralized system.
Why can’t all three co-exist simultaneously? This is due to the fact that blockchains are peer-to-peer distributed networks. We’ve already discussed that increasing nodes in a network affect scalability in a negative way. Decreasing the number of nodes will result in a centralized system with focal points of weaknesses. Therefore, this would increase both the decentralization of the network and would put the ledger under the threat of attacks.
Possible Scalability Solutions
So, is there a solution to the blockchain’s scalability problems? Well, yes and no. Many sorts of solutions are now being deployed in order to tackle the scalability issue. We can divide scalability solutions layer-1 and layer-2 solutions categories.
Layer-1 Solutions
Layer-1 solutions are on-chain scaling solutions that change something fundamental about how the blockchain works. These solutions target core elements in a blockchain like increasing the block size or decreasing the confirmation time of blocks.
Sharding
Sharding is a splitting technique used to distribute the computational and storage load across the blockchain network. This on-chain scalability technique breaks down the blockchain into smaller parts known as shards that would operate simultaneously next to each other. This enables the network to execute a large number of transactions per second, and thus, helps with scalability.
How? Well, each node in a blockchain network is responsible for storing the entirety of the ledger, which means a huge amount of crucial data and records of transactions. This slows down the network and creates unwanted latency problems. This network burden could be somewhat solved by sharding, since each node wouldn’t be responsible to manage the entirety of the blockchain, instead, the workload would be divided into sections that can be managed more effectively.
Change of Consensus
A layer-1 solution that would help with scalability issues is to change the consensus mechanism applied in a blockchain. For example, the Bitcoin blockchain operates on a proof-of-work consensus. That means that miners have to solve complex algorithms in order to validate transactions, which ultimately can take a long time. Thus, creating latency issues. Ethereum’s upgrade to proof-of-stake increased the blockchain’s throughput to 27 TPS, since it eliminated the computational effort needed to mine a certain block.
Other consensus mechanisms that might help blockchain scalability include:
- Delegated Proof-of-Stake: a PoS consensus works by having validators stake their crypto for a random chance of getting selected. A delegated PoS works just like that, but instead of random assigning, it resembles democratic selection. Here, token holders get to choose validators for network transactions.
- Proof-of-Authority: PoA is another consensus mechanism that can act as a solution for blockchain scalability. The proof-of-Authority consensus gives a small number of blockchain nodes the power to validate transactions.
Segregated Witness
Segregated Witness, or SegWit, is another layer-1 solution that can aid with scalability problems. SegWit is a blockchain protocol in the Bitcoin blockchain that changes the way transactions carry data. The protocol separates the transaction data into two segments, the signature data and the sender/receiver data. SegWit eliminates the signature data from the transactions as they are transferred. Validators will later add this data to the blockchain.
Removing the signature data frees up the capacity of a Bitcoin block so that more transactions could be added to the 1 MB block. The SegWit protocol is considered a soft fork that doesn’t require the blockchain to split up into two different chains.
Layer-2 Solutions
Another type of scaling solution includes options that don’t fundamentally change the blockchain network. These solutions go by the name layer-2 or off-chain solutions. Layer-2 solutions are protocols that build on top of the mainnet of a blockchain. These off-chain options can help navigate network congestion and latency issues.
State Channels
State channels are a popular layer-2 solution that is implemented to enhance blockchain scalability. They provide the process in which transactions are executed between parties outside the blockchain, or off-chain, which decreases the on-chain operations.
Although it seems like a bad process, as off-chain transactions might not be secure as on-chain transactions, however, the process achieves the same amount of security without needing that much network resources. Validators then will add Off-chain transactions to the blockchain.
On-chain transactions reduce to only include necessary sequences, which drastically increases the speed of blockchain operations. Thus, enhancing scalability.
Side Chains
Side chains are independent chains that are linked to the main blockchain (mainnet) that enabled token and asset transfer between the two. Each side chain act as an independent network with its own protocol, token, and consensus. There could be multiple side chains to a main blockchain, each having a different task depending on the blockchain’s needs.
Side chains can take the load off a blockchain, where a side chain creates a transaction on the first blockchain by locking the assets. Then, it would create a transaction on the other chain (the side chain) and provide cryptographic proof to the transaction that the assets were locked. Therefore, side chains offer increased scalability.
Will the Blockchain Ever Scale?
The increasing demand for blockchain applications and the road to mass adoption has affected blockchain technology rather negatively. Blockchain scalability problems will continue to increase as more users get into the Web3 space. However, scalability solutions, such as off-chain and on-chain solutions, might provide a fix to latency issues. Blockchain technology is still new and fresh to the scene. This means that new advancements and possible solutions are probably in the making.