The TPS Race: How Leading Cryptocurrencies Are Overcoming the Scalability Problem
Scalability is still the biggest obstacle cryptocurrencies have to overcome to become a viable financial asset in the real world.
Thankfully, several innovative approaches have been proposed to solve this problem with promising results so far. What are these solutions and how do they work behind the scenes to prevent bottlenecks that hamper the scalability of blockchains?
Why Scalability Matters
Scalability is a concern not only for cryptocurrencies but also for any network that deals with transactions. Simply put, how can a network (in this case, the blockchain) add or process more transactions without sacrificing performance, security, or reliability?
The crypto space has experienced the impacts of congested networks repeatedly throughout its history. Bitcoin transaction fees rose to as high as $28 at its peak in 2017, while Ethereum suffered a network-wide slowdown and gas price increase in 2018 due to the popularity of Cryptokitties, a blockchain-powered, virtual trading game.
These challenges have led to crypto developers doing all they can to find a working solution. If a blockchain can’t handle the demands of bulk transactions, it will never succeed in the real world where thousands of payments are made every second. Scalability must be solved before blockchains can be deemed practical transaction instruments for currencies or other uses.
Why Cryptocurrencies Are Impacted by Scalability Challenges
Decentralized networks have poor scalability almost by design due to peers coming in and out of the network independently. Every peer movement causes a communication gap, leading to latency or delays when data is transferred. This can also happen if the nodes in a blockchain are overloaded with requests — leading to network “traffic jams”.
The more congested a network is, the more expensive transaction fees become as miners prioritize blocks with higher rewards, which creates a cost barrier for people to make payments with cryptocurrencies. A prominent example was in June 2017 when Bitcoin network fees skyrocketed to $5, a figure close to half of the world’s daily living costs.
However, enabling scalability is not as easy as it seems. When a network is expanded, security can take a hit as there are more nodes to manage now. Scalability can also be accomplished by strengthening the control of certain network validators, which defeats the purpose of decentralization in the first place.
The question is, how can cryptocurrencies balance these factors while attaining optimal scalability?
What Leading Cryptocurrencies Are Doing to Overcome the Scalability Problem
1. Ethereum’s ETH 2.0 Upgrade
Bitcoin uses around 7 gigawatts of electricity — a figure equal to 0.21% of the world’s supply — every year to mine blocks in its proof-of-work (PoW) model. It’s clear that PoW consumes too many resources and is unsustainable for future generations. This, along with scalability, is the problem Ethereum is trying to solve in its upcoming ETH 2.0 update.
ETH 2.0 has two proposed features that will improve the network’s ability to meet high levels of demand and maintain sustainability:
- Implement Proof-of-Stake (PoS) to replace PoW
- Introduce sharding to improve transaction speed and output
PoS verifies transactions through a voting process involving a set of nodes known as validators. To become a validator, a party must stake or pledge a minimum of 32 ETH to be able to “vote” in the network’s consensus process. Validators validate transactions and build blocks of these transactions, which are then collectively confirmed by other validators to be added to the blockchain.
Sharding essentially breaks the network into smaller pieces running in parallel to increase transaction speeds and improve scalability. Instead of one group of nodes doing all the work, sharding spreads the workload across many parallel branches of nodes, which is a massive benefit when the network is overloaded. You can learn more about ETH 2.0 and how it tackles scalability in our comprehensive guide here.
2. Bitcoin’s Lightning Network
Lightning Network is Bitcoin’s approach to achieving scalability without sacrificing security and privacy. The technology allows users to perform transactions off-chain (outside of the Bitcoin blockchain) with other Bitcoin addresses privately rather than processing everything on the main blockchain.
To achieve this, Lightning Network allows users to establish separate, private payment channels with any other user on the network. These channels are then used to send transactions between the two parties and will exist as long as needed. Since no other parties are involved, transactions become lightning-fast (hence the name) and cost little to nothing.
One downside of the Lightning Network is that it’s exclusive to Bitcoin and its network forks like Bitcoin Cash, Digibyte, and Litecoin. Some people also argue that it will lead to the centralization of the network.
3. Block Size Increases
A block contains data for recent transactions performed on a blockchain. Once a block is full, a new block is added to record new transactions. This is why the blockchain is referred to as a digital ledger, as each block is similar to a page of a ledger, which is then linked with other blocks to create a complete database.
Small block sizes limit scalability as there is only so much data a block can store. The obvious solution would be to increase the block size. However, there are several unwanted side effects to consider when this is done.
Bigger block sizes would reduce decentralization, as nodes will be more expensive to run due to increased hardware requirements. Increased node costs would favor individuals with deeper pockets, hence giving them more power and control over the network.
Security issues may also be a concern as some people believe with Bitcoin Cash’s implementation of increased block sizes, for example. Centralization increases the surface threat for security breaches, for one, as there are fewer nodes to target and attack. This can lead to orphaned blocks, which happens when a block is not accepted into a blockchain network due to security or network issues.
4. Batched Payments
Batch payments use one main wallet to receive and send out payments. This is often used in exchanges to save money since the user only needs to pay one transaction fee. Scalability is achieved by reducing the number of transactions that need to be processed by nodes.
However, batch payments are limited in their utility. If five people are standing in line to buy coffee, it’s not possible to group their payments and send them to the shop in one go.
Batch transactions can also raise privacy concerns and risk receiving hefty non-compliance fines since the details of every payment in a batch are visible to users. A company using batch payments to manage payroll, for instance, may violate labor laws if their employees can see who is being paid how much. Security and privacy measures in cryptoassets have to be stepped up if batch payments are to succeed in enabling scalability.
5. Other Solutions
There are plenty of other solutions for scaling blockchains on the market as well, many of them using their own novel consensus mechanisms to process transactions. This includes projects such as Stellar (federated byzantine agreement), Zilliqa (sharding, with hybrid PoW-practical byzantine fault tolerance), Hyperledger (practical byzantine fault tolerance), Holochain (Holochain consensus), and Nano (directed acyclic graph), among others. Although none of these solutions has been rigorously tested on a large enough scale to call them reliable and secure (yet), the future looks promising for scalable blockchain technologies.
How Blue Swan Helps Investors Keep up With the Latest Cryptocurrency Updates
Scalability is a monumental challenge for cryptocurrencies but innovative solutions are being implemented with positive results. With the impending arrival of groundbreaking features like new sharding-based PoS models, it won’t be long before cryptoassets are able to rival the processing power of mainstream transaction networks like Visa and PayPal. Indeed, the technology may already be here, with its security and reliability only needing to be tested.
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