The three best scalability solutions for cryptocurrencies

scalability

What is scalability?

Scalability can be defined as the ability of any system or process to grow and adapt when the demand or workload increases. If this growth is possible without negatively impacting the quality of the system, then we can say it is scalable. In the world of e-commerce, for example, a sales process is considered scalable if it can handle a sudden increase in product demand without overwhelming the system, while maintaining service quality and delivery times.

In the context of cryptocurrencies, scalability refers to a blockchain network’s capacity to handle high transaction volumes without affecting their processing. Scalability is directly related to the consensus algorithm used by the network. Some networks, like Bitcoin, have experienced significant scalability issues. During peak transaction periods, users have experienced delays in transaction confirmation and higher transaction fees.

scalability

Distributed systems like blockchain rely on constant communication among nodes. Processing an additional transaction requires extensive communication among the nodes, which slows down the process. To process a transaction, it must be sent to each validating node, and they must communicate their approval.

Consequences of low scalability

Now that we understand what scalability is, let’s explore why it is crucial. The answer seems simple at first. If scalability is related to a network’s growth capacity, then low scalability could imply limited future growth for that cryptocurrency. Essentially, we’re talking about an increase in demand for the cryptocurrency with a constant supply.

In other industries, scenarios like this often lead to price increases for users. The same situation could occur with cryptocurrencies. If the only way to ensure my transaction is processed is by paying a high fee to “jump the queue,” I will do it. It’s no coincidence that the number of Bitcoin transactions reached a record high in recent months, and transaction fees surged accordingly. Currently, there are nearly half a million transactions waiting to be validated for this reason.

This issue is closely tied to the mining validation process. Remember that mining nodes receive a dual reward for each mined block. They receive newly created coins (mining rewards) and the fees included in the transactions of the mined block. Consequently, Bitcoin miners have clear incentives to prioritize mining blocks with higher fees.

Another significant consequence of low scalability is network congestion. If demand increases while supply remains the same, there will come a point where demand cannot be satisfied. We have already seen episodes of this nature in Bitcoin, and if its usage continues to grow, these occurrences will become more frequent.

Types of Solutions

When it comes to addressing scalability, the advantage of centralized systems is evident since scalability depends solely on the central node. In DLT networks, however, the growth in the number of transactions can compromise system efficiency. Moreover, a larger number of nodes could also be detrimental because it would require the same level of communication among a greater number of participants.

Given these factors, scalability is a crucial aspect for any cryptocurrency aspiring to be used as a global payment medium. Traditional electronic payment systems are easily scalable and can handle thousands of transactions per second (e.g., Visa processes around 20,000 transactions per second, while Bitcoin only handles about 7). Therefore, networks aiming to compete with them must significantly improve in this aspect. If these networks incorporate Smart Contracts and Decentralized Applications, the need for scalability becomes even more significant.

Scalability trilemma

However, it is important not to forget that scalability is not the only concern in blockchains. Due to their technical design and inclination towards decentralization, networks face a triple problem. This problem, known as the Scalability Trilemma, highlights the challenges of designing a network that is simultaneously scalable, secure, and decentralized. Due to the observed difficulty, there aren’t many valid solutions, but we can group them into three categories.

  1. Block-based solutions
  2. Sharding
  3. Payment Channels

Block-based solutions

In the first group, we can find solutions such as the one that led to the creation of Bitcoin Cash from the original Bitcoin network. Since Bitcoin’s blocks are mined every 10 minutes and allow an average of 7-8 transactions per second, increasing the block size seems like a clear solution. As a result, a part of the Bitcoin developer community decided to create a network that was very similar but with larger blocks capable of accommodating more transactions. Through a hard fork, the maximum block size increased from 1 MB to 8 MB, enabling a higher number of transactions per second, giving birth to Bitcoin Cash.

While this solution can provide relief from potential congestion during specific moments, the risk of saturation still exists. The network can still become congested if the demand increases (although the saturation point is further away), so it is not a definitive solution. The block mining time could also be reduced to increase transaction processing speed, but this could have implications for network security.

Another proposed solution is SegWit, short for Segregated Witness. This development implies, de facto, an increase in the block size, but it is implemented differently than Bitcoin Cash. With SegWit, the block size is not measured in bytes but in units, and a portion of the transaction information is moved outside the transaction, resulting in less space occupation. The consequences of this solution are a larger block size (approximately 1.8 MB compared to the original 1 MB) and an improvement in security.

Sharding

The second group of solutions includes the approach adopted by Ethereum in its version 2.0, which is based on “sharding” or similar functionalities. This development involves subdividing the main data chain into several smaller chains that work with a limited amount of data while maintaining the security levels of the main chain. This way, the main network is not overloaded and can accommodate higher transaction volumes.

sharding

This solution appears to be more stable and allows for greater scalability than other described solutions. However, current use cases are limited and have not been sufficiently tested, especially when compared to the transaction volume of traditional payment systems. Additionally, it may have negative implications for network security.

Nevertheless, this solution has two significant additional advantages. Firstly, sharding has been a scalability solution in traditional database management, even though it hasn’t been widely used in cryptocurrencies. This means that there is already considerable experience in using this type of technique. Secondly, by reducing the workload of nodes, the network becomes more “accessible.” It’s worth noting that one of Bitcoin’s problems is that the difficulty of its mining algorithm was concentrating mining power, thus compromising decentralization.

Sharding, on the other hand, alleviates the computational demand on nodes, making it easier to collaborate with the network. As a result, the level of decentralization is not compromised. In addition to Ethereum, there is another cryptocurrency that utilizes sharding, albeit in a different way—Polkadot.

Polkadot Case

Polkadot is a blockchain that has aimed to overcome the classic scalability problems of cryptocurrencies from the beginning. It has designed a network that guarantees not only scalability but also interoperability between different blockchains. To achieve this, it has been built based on several distinctive elements:

  • Interoperable chain structure – Polkadot consists of subchains called Parachains that connect to the main chain (Relay Chain). Parachains are independent but interoperable blockchains organized into “shards.” This design allows for scalability.
  • Existence of 4 different types of nodes – There are collators, nominators, validators, and fishermen nodes. They are responsible for gathering information, creating blocks, validating them, and searching for fraudulent transactions in the network, respectively. This ensures the functioning and security of the system.
  • Consensus through NPoS – This algorithm, conceived as a variant of Proof of Stake, enables the integration and coordination of all network elements.
relay chain and parachains

Thanks to these three elements, Polkadot serves as a perfect example of how a cryptocurrency can develop innovative alternatives to tackle interoperability and scalability issues.

Payment Channels

Lastly, there are solutions based on payment channels. Instead of modifying the number of data chains or block parameters, these solutions reduce the number of transactions that need to be sent to the network by utilizing Smart Contracts. Essentially, they group transactions that have occurred between specific users (who must have trust in each other) to send only the final balances of the accounts to the blockchain.

All intermediate transactions are stored in Smart Contracts but not sent to the general ledger, hence the need for trust between the parties. This solution dramatically reduces the amount of data the network needs to process, but it requires a certain level of trust between the parties and is more susceptible to fraud. This solution has already been implemented with Bitcoin through the use of Lightning Network, but it does not yet have full industry consensus.

Conclusion

In conclusion, various solutions have been developed and continue to be researched to improve the scalability of blockchain networks, as their growth relies directly on their ability to scale. Adopting one or several of the solutions described here can lead to significant advancements, but one must consider the associated risks and implications for network security, transaction fees, etc. Over time, current solutions and emerging ones will have the opportunity to demonstrate their effectiveness in the face of the expected increase in network usage, especially as more Decentralized Applications and Smart Contracts are implemented.

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