Scalability is one of the most significant talking points of the entire crypto ecosystem. People will ask the developers for every blockchain solution to real-life problems, “How scalable is it?”
Scalability is one of the Blockchain’s Trilemma (alongside decentralization and security). It means that for every blockchain to function successfully, it must have a structure that favors democratic governance (DECENTRALIZATION), SECURITY of assets, identity, and information, AND it must be able to SCALE for a multitude of users by ensuring fast and speedy transactions.
What is Scalability?
Scalability measures how many transactions a blockchain can handle at any given time. Two primary metrics for determining the level of scalability of any system are:
1. Transaction throughput refers to the measure of transactions a blockchain can handle per second. For example, Bitcoin, the mother of all cryptocurrencies, can handle up to 7 transactions per second (TPS). If there are more than seven transactions to be verified at a time, the system automatically queues the rest in the mempool (memory pool).
2. Transaction Finality: This refers to the amount of time it takes for a transaction to become irreversible. A Bitcoin transaction is confirmed after its block is added to the blockchain (approximately 10 minutes). However, for a Bitcoin transaction to be completely immutable, six more blocks must be added to ensure that stale/orphan blocks won’t be created (approximately an hour).
As the first cryptocurrency, Bitcoin was designed to be more than just a store of value; it was created to facilitate borderless digital payments with decentralization at its core. In other words, cryptocurrency exists so that you can easily go to the store, pick up a few groceries, and make payments from your bitcoin wallet.
So, peradventure you traveled from the United States to some European country, you can make payments from the same cryptocurrency wallet without changing your U.S. dollar to Euro or creating a new bank account. Moreover, you can make payments to everyone, everywhere, at every time, without being subject to bureaucratic regulations. How pleasant?
However, regardless of the utopian financial system promised by cryptocurrency, it will only remain a fantasy and not a reality without ensuring a system that scales for a broad audience. For example, imagine if everyone wants to pay for their items at a grocery store with Bitcoin, and each person has to wait for an average of 10 minutes to confirm each transaction. It means that, as the 6th person in the queue, you would have to wait for an hour to confirm your transaction. Yuck! The imagination of that doesn’t particularly seem appealing.
Scalability and Cheaper Fees
Blockchain and Ethereum, the first two major cryptocurrencies, employed a Proof-of-Work consensus mechanism for governing the ecosystem. This means that miners (who run the network) need to expend some amount of computing power to confirm and verify transactions. Miners are rewarded with gas fees for their troubles.
In times of high transaction volumes, demand for miners needed to verify transactions increases; hence, the mempool is loaded with many unconfirmed transactions, and the system becomes slow. At this point, miners will begin to prioritize transactions with higher gas fees because they will need even more computing power due to the network’s congestion.
So, back to our example; imagine if your entire bill at the grocery store is only $20, and while you need to wait for about 10 minutes to confirm it, you can also end up paying about $5 in gas fees. That is grossly unviable.
Therefore, if cryptocurrency will genuinely be adopted as a mainstream method of digital payments, these issues of transaction throughput, finality, and fees must be addressed without compromising security or decentralization.
What Scalability Solutions Currently Exist?
As you would expect, many blockchain solutions have come with the promise of solving scalability issues in the blockchain. For example, Solana, which was created nine years after bitcoin, is one such blockchain that assures users of 50,000 TPS and 2.5 seconds transaction finality – a massive improvement on the initial 7 TPS and 1-hour transaction finality of Bitcoin. In addition, Solana uses a Proof-of-History consensus mechanism to ensure a scalable system without compromising security and decentralization.
Like Solana, many recent blockchains have deviated from the traditional Proof-of-Work and Proof-of-Stake consensus mechanisms into more scalable ones to achieve high transaction throughput and finality. Some examples are:
· Proof-of-Authority (PoA) Consensus Mechanism: PoA consensus mechanism works by limiting the number of validator nodes to a few trusted individuals who have staked their reputations. These reputable nodes dictate transaction states, offering speed since only a few people need to confirm transactions. However, PoA is not widely accepted because it is not entirely decentralized. Nevertheless, its model is optimal for private, permissioned-blockchains.
· Delegated Proof-of-Stake (DPoS) Consensus Mechanism: DPoS consensus mechanisms validate and confirm transactions much quicker than the traditional PoS or PoW blockchains. This consensus mechanism involves one where network participants (delegates) nominate a few validators (usually from 10 to 100) to validate transactions and produce new blocks. Since the number of validators is small, transactions are completed faster.
However, unlike PoA, centralization is avoided in DPoS because all delegates can hold the validators accountable; hence, validators are enjoined to act honestly.
· Byzantine Fault Tolerance (BFT) Consensus Mechanism: BFT consensus mechanism achieves consensus instantly, ignoring the antagonists in the network. In a BFT system, if two-thirds of the validating nodes reach consensus but one-third fail or act maliciously, the network will attain a consensus.
However, scalability solutions are required for existing Proof-of-Work ecosystems like Bitcoin and Ethereum and other Layer-1 blockchains that operate on a Proof-of-Stake consensus mechanism.
Scalability Solutions are Currently Divided into three:
· On-Chain Scaling: On-chain scaling solutions are direct modifications made to a blockchain; they aim to improve the network capacity of the layer-1 blockchains by reducing transaction sizes, increasing block sizes, splitting data processing, and using key aggregation for signatures. Two primary on-chain solutions are Sharding and Segregated Witnesses.
· Off-Chain Scaling: Off-chain scaling techniques are done outside the blockchain; they are not direct modifications. They are often called Layer-2 solutions because they work above a Layer-1 blockchain to optimize speed and cost-effectiveness. Layer 2 technologies include roll-ups, state channels, sidechains, plasma chains, and validium chains.
· Distributed Ledger Technology (DLT): DLTs are controlled by several network participants distributed across multiple nodes in a peer-to-peer network. These individual ledgers use different data structures to simultaneously organize information so that various transactions are validated in a short period. As a result, DLT solutions are decentralized and secure.
One of the primary goals of blockchain technology and cryptocurrency is to achieve global adoption and mainstream usage. However, to do this, blockchain technology must be able to scale for millions of people.
Year after year, more people are interested in cryptocurrency, and more people adopt blockchain technology. Yet, no one has all the answers to solving the blockchain trilemma; however, with more advancements, the blockchain will continually improve to solve scalability issues and provide a seamless experience for users.
We hope that we have provided vital insights into what blockchain scalability is all about. So do check out our articles that broadly explain on-chain and off-chain solutions and other interesting beginner articles on the CCTIP blog.