cryptocurrency scalability challenge

Overview of the Scalability Problem and Possible Solutions

– The biggest problem of blockchains today is scalability.

What is scalability?

Scalability is the ability of a computing process to be used or produced in a range of capabilities.

We make a difference between:
– Horizontal scalability = more machines are added for the increasing task
– Vertical scalability = adding more power to the machine to handle the increasingly difficult task.

The problem with blockchain scalability is the fact that every node validates and updates the ledger. Because of that, traditional horizontal scalability brings no benefit. So most blockchain projects aim at vertical scaling. This is believed to be achieved through higher block size and fewer validating nodes.
Several blockchains today can scale to thousands of transactions per second, but what is often overlooked is that this comes with a price.

In theory, there is a holy trifecta of scalability:

  • Decentralization
  • Security
  • Speed
    Only two can be achieved together, and one must be sacrificed for scalability on the base-layer!!
    For example:
    – Bitcoin: Security and Decentralization, but no Speed.
    – Ripple XRP: Speed, but no Security and no Decentralization
    – EOS: Speed, no Decentralization, and no Security
    – Ethereum: Security and Decentralization but no Speed.

So, many projects sacrifice Security and Decentralization in favor of high transaction throughput. EOS has only 21 validator nodes. can it do hundreds of tx per second? Hell yes. Is this decentralized or secure? hell no!

So what options do we have:

  • Bigger blocks: not good. If the block size is bigger the hardware requirements for full nodes rise and this leads inevitably to increased centralization and reduced security.
  • Fewer validator nodes: highly centralized and insecure.

So, what alternatives do we have?

The key to successful scalability is Layer2 solutions. These are layers that are built on top of a secure base-layer to achieve high throughput without compromising security.
How is this achieved?
– Remember, scaling solutions inevitable decrease Security and Decentralization. So upgrading on-chain scaling is a bad way.
Instead, we leave the base-layer alone and build protocols on top of them that are a little less secure but provide higher throughput.
You can build an insecure layer on top of a base-layer, but you can not build a secure layer on top of an insecure base-layer!!

Instead of compromising our secure base-layer (for example the Bitcoin and Ethereum blockchains) we build these slightly less secure layers on top of our base layers. Applications that need high throughput can use these Layer2-environments and at the same time benefit from a secure base-layer. The root-layer is used as a settlement layer.
Examples for these Layer2-scaling solutions are Lightning Network for Bitcoin and Loom Network, Raiden and Plasma Cash for Ethereum