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Blockchain technology has gained significant popularity in recent years, with cryptocurrencies like Bitcoin and Ethereum becoming more mainstream. However, the initial design of these cryptocurrencies was not intended for widespread use and adaptation. As a result, scalability has emerged as a major challenge for blockchain technology.
The Scalability Problem of Cryptocurrencies
To compete with mainstream systems like Visa and PayPal, cryptocurrencies need to improve their transaction times. While PayPal can handle 193 transactions per second and Visa can manage 1667 transactions per second, Ethereum only processes 20 transactions per second, and Bitcoin manages a mere 7 transactions per second. The scalability problem in cryptocurrencies can be categorized into two main issues:
- The time taken to put a transaction in a block.
- The time taken to reach a consensus.
The Time Taken To Put A Transaction In The Block
In Bitcoin and Ethereum, a transaction is included in a block when a miner adds the transaction data to the block they have mined. As the popularity of Bitcoin increases, this process becomes more time-consuming. Additionally, transaction fees come into play. Miners become temporary dictators of the block they mine, and users must pay transaction fees to ensure their transactions are prioritized. This can be financially burdensome, especially for users with limited funds.
For example, users who pay the lowest possible transaction fees may have to wait for a median time of 13 minutes for their transaction to be processed. Transactions often have to wait until a new block is mined, as the previous blocks become filled with transactions. Bitcoin’s size limit of 1 MB severely limits its transaction capacity.
Ethereum, on the other hand, theoretically has the ability to process 1000 transactions per second. However, it is limited by a gas limit of 6.7 million on each block. Gas refers to the computational effort required to execute a smart contract. Miners can only include transactions in a block if the gas requirements of those transactions do not exceed the gas limit of the block.
The Time Taken To Reach A Consensus
Blockchain-based currencies operate as peer-to-peer networks, where participants or nodes do not have any special privileges. The goal is to create an egalitarian network without a central authority or hierarchy. However, achieving consensus in such a decentralized system can be slow.
In the gossip protocol followed by blockchain networks, nodes propagate information about transactions to their neighbors, creating a trustless system. Each node must have its own copy of the blockchain to independently verify the validity of transactions. As the number of nodes increases, the consensus process becomes slower.
This is particularly problematic for Ethereum, which has a higher number of nodes compared to other cryptocurrencies. The increased popularity of Ethereum, driven by the ICO craze, has significantly increased the number of nodes in its network. As of May 2017, Ethereum had 25,000 nodes compared to Bitcoin’s 7,000, an 81% increase in just one month.
Solutions to Blockchain Scalability Issues
Both Bitcoin and Ethereum have proposed various solutions to address their scalability challenges. Some of these solutions have already been implemented, while others are still in development. Let’s explore some of the major solutions:
- Segwit (Exclusive to Bitcoin)
- Block Size Increase
- Sharding
- Proof of Stake
- Off-Chain State Channels
- Plasma
Segwit (Exclusive to Bitcoin)
Segwit, or Segregated Witness, was envisioned as a feature of a sidechain running parallel to the main Bitcoin blockchain. Segwit separates the transaction signature data from the transaction block, freeing up space in the block for more transactions. By activating Segwit, the signature data is moved to the sidechain, known as an extended block.
Implementing Segwit has several benefits, including increased transaction capacity, reduced transaction fees, and faster confirmation times. It also resolves issues such as transaction malleability and paves the way for the activation of the Lightning Network, which is an off-chain micropayment system.
However, Segwit implementation is complex, and all wallets must implement it correctly. It also requires additional resources and may lead to increased centralization if only large-scale mining pools can afford the necessary processing power.
Block Size Increase
Increasing the block size is a straightforward solution to improve transaction capacity. Bitcoin, in particular, has faced a heated debate over whether to increase its block size. Supporters argue that a larger block size will allow more transactions per block, making Bitcoin more accessible for everyday use.
However, increasing the block size has its critics. They believe it will decrease miners’ incentives and lead to increased centralization. It may also split the community and create multiple versions of the blockchain.
Ethereum has also considered increasing its block size, but concerns about scalability, centralization, and community division have hindered its implementation.
Sharding
Sharding is a technique that breaks down the blockchain into smaller parts called shards. Each shard contains its own subset of transactions and has its own state. The goal is to increase performance by allowing multiple parallel transactions to occur simultaneously.
Ethereum’s sharding implementation involves a two-level structure. The first level consists of transaction groups specific to each shard, while the second level represents the overall blockchain. Sharding improves scalability by reducing the time taken for transaction verification and enabling parallel processing.
Challenges in implementing sharding include securely assigning nodes to shards and ensuring trustless verification of transactions within each shard.
Proof of Stake
Proof of Stake (PoS) is an alternative consensus algorithm to Proof of Work (PoW). PoS eliminates the need for mining by having validators lock up their cryptocurrency as stake. Validators are randomly selected to validate blocks and are rewarded with transaction fees proportional to their stake.
The transition from PoW to PoS requires Ethereum to implement the Casper protocol. This shift to PoS is expected to reduce energy and monetary costs, eliminate the advantage of specialized mining equipment, and make 51% attacks more difficult. PoS also enhances scalability by enabling faster block creation.
Implementing PoS has its challenges, including maintaining the security and integrity of the blockchain, addressing concerns about centralization, and ensuring a smooth transition from PoW to PoS.
Off-Chain State Channels
Off-chain state channels allow participants to conduct interactions off the blockchain, reducing transaction time and dependence on miners. State channels are two-way communication channels between participants that enable them to transact with each other without involving third parties.
Bitcoin’s Lightning Network and Ethereum’s Raiden Network are examples of off-chain state channels. These networks enable users to sign transactions among themselves and only broadcast the final transaction to the blockchain. This significantly improves transaction speed and reduces transaction fees.
Implementing off-chain state channels requires multi-signature or smart contract locking of blockchain states and predetermined conditions for closing the channels.
Plasma
Plasma is a series of contracts that run on top of the Ethereum blockchain, creating child blockchains or “branches” connected to the main chain. These branches, or plasma chains, can issue their own tokens and handle their own transactions. Periodically, the plasma chains submit reports to the main chain, reducing the load on the main chain.
Plasma improves scalability by reducing the space required in the main chain and increasing transaction processing speed. It also allows for the creation of unique tokens and incentivizes chain validators to maintain the branches.
Challenges in implementing plasma include assigning validators to chains, ensuring fault-free operation of plasma chains, and maintaining the security and integrity of the overall network.
Looking Ahead: The Future of Blockchain Scalability
Scalability is a pressing issue for blockchain technology, and various solutions are being developed and implemented to address this challenge. While these solutions show promise, their effectiveness in solving scalability issues remains to be seen.
Bitcoin’s activation of Segwit and proposed block size increase, along with Ethereum’s transition to PoS, implementation of sharding, and exploration of off-chain state channels and plasma, demonstrate the ongoing efforts to improve scalability. However, challenges such as security, centralization, and community consensus must be addressed to ensure the successful implementation of these solutions.
Blockchain technology has the potential to revolutionize various industries, but scalability is a critical factor in its widespread adoption. As cryptocurrencies become more mainstream, the scalability problem must be effectively tackled to enable efficient and scalable blockchain solutions.
