If Blockchain Is So Great, Why Hasn't It Replaced Current Systems? | Carthago
A dive into Blockchains scalability problem
The Rising Demand for Blockchain
Ethereum in the past 5 years has seen its number of active users increase by roughly 3600% from 15,000 users in early 2017 to roughly 550,000 concurrent users today. This rapid adoption brought incredible gains to Ethereum’s ecosystem lifting the market cap from around 5 billion to 350 billion currently. This increase brought financial inclusion and success to many pioneers of the space in turn spurring increased public interest in Web3. With demand for ecosystem availability skyrocketing, many networks are struggling to keep up with the industry's monumental pace. This struggle of pace keeping can be most notably seen in Ethereum’s increase in gas prices in recent years. To better understand how Ethereum's gas price relates to the scalability of the Blockchain, let's dive into what gas is and how it works.
Ethereum and Gas Fees
The key difference between Ethereum and Bitcoin can be explained as a difference in functionality. The Bitcoin network acts as a store of value in which all parties involved are doing nothing more than tracking the transactions of Bitcoin in a decentralized manner. Ethereum’s founder Vitalik Buterin revolutionized the Blockchain Industry by introducing programmable code to the blockchain ecosystem. This programmability comes in the form of smart contracts or dApps (decentralized applications). Smart contracts introduced the unprecedented ability to facilitate trade through shared mutual trust in computer code. For example, John can negotiate an agreement in which if he mows Dave’s yard, he gets paid. Where Bitcoin acts as a store of value, Buterin imagined a platform in which users could compose and expand upon the capabilities of generalized programmability on the blockchain. In order to maintain a network's level of trusted security between users, it is imperative that the information that is present on the blockchain is backed up in an immutable nature. This foundational understanding of blockchain led early developers of Ethereum to a fundamental problem.
What happens if someone just codes an infinite loop to crash the network?
The solution to this problem came in the form of gas fees. For every time a program is called upon on the Ethereum blockchain, the user must pay a gas fee for the code to execute, thus eliminating the possibility of an infinite loop. As with many disruptive technologies, with every problem solved, brings new and unique challenges to be tackled.
Gas Fees, Transaction Costs, and Current Obstacles
It is important to understand that a blockchain network has a fixed rate at which it can process transactions. For Bitcoin, this number is around 7 transactions per second, while Ethereum's sits slightly higher at 30 per second. As the years have passed both of these networks have seen network participation increase at monumental levels, this increase in participation has led to a significant struggle of the network to keep up with demand due to its transaction speed remaining constant. With only a limited number of transactions permitted in a given time, users are forced to bid between one another on who is willing to pay the most money to get their transaction through first. Miners on the network (those in charge of validating transactions) are incentivized to validate transactions with the highest gas fee because of this. Users who don't bid on high gas prices most often are met with lengthy wait times and can even see their transaction perpetually pushed to the back of the line if their bid on a gas fee is too low. The decentralized foundation of both of these networks has created an unregulated market which in recent years has seen transaction fees sore to what many experts claim to be unusable for those without financial surplus and certainly not financially inclusive like believers of the industry claim. Jacob Rozen, a software engineer with an expressed interest in the industry writes as follows.
“For most normal people, the blockchain is pretty much unusable for average size transactions. Recently, to send an ERC20 token cost me over US$60. To complete a simple Uniswap trade can run between $60 and $100 for each transaction. Unless you’re willing to pay $100-$200, you can forget about a complex smart contract interaction — it’s a financial nightmare.” -Jacob Rozen, 2021.
Layer 1, Layer 2, and the Issue of Security
With users facing high fees for moving money between networks, many have turned to what's called layer 2 as a solution. Taking advantage of Ethereum’s composable nature, projects are built upon the already existing infrastructure of Ethereum’s ecosystem where transactions can happen independently of the main chain. This means that developers can create networks capable of processing transactions at lightning-quick speeds navigating around the congestion of the greater network. For example, Axie Infinite, a play-to-earn game I’ve written about before in “NFT Gamings Case To Alleviate Extreme Poverty”. Is a game on a layer 2 network known as Ronin that is built upon the Ethereum ecosystem as its foundation. While solutions like this offer developers freedom to create their own projects and foster innovative ideas, the introduction of composable code into smart contracts mean programs written in a faulty manner could result in its exploitation by hackers. One such example happened at the end of March 2022 with the previously mentioned Axie Infinite falling victim to a hack in which perpetrators made away with roughly 615 million dollars due to hackers finding a few vulnerable lines of code in a smart contract. As the industry continues to mature, developers and business owners alike are recognizing the vital nature of security in not just the blockchain network, but even the programs that run ontop of them.
Understanding Scalability
Immense gas and transaction costs in blockchain networks can most often be attributed to the cause of limited scalability within the network. Many experts compare this to the analogy of traffic pilling up on busy roads. As new and exciting blockchains become available to the public, they too run into the same problems of network congestion as users flood in. With immense numbers of new users flooding the network every day, its easy for the improvements carried out to network capacity to go unoticed by the public. Since 2017, Ethereum has seen 10 upgrades to the network that have brought increased capacity and efficiency for users following Ethereums plan for significant increase in scalability. Beginning in 2020 Ethereum rolled out a three step plan to bring significantly greater levels of scalability into the network. Split into the beacon chain, which has been active since December 2020, the merge, estimated to drop summer of 2022, and finally shard chains, an upgrade set to launch in 2023. This upgrade, while broken up into different parts, is part of a collective decision of the community to migrate their consensus mechanism
Consesus Mechanisms and Scalability
The consensus mechanism for a blockchain can be understood as the collection of all the processes taken that to assure validity across the network. Invented by Satoshi Nakamoto, the anonymous inventor of Bitcoin, the proof of work consensus model has proved its success being the driving mechanism behind both the Bitcoin and Ethereum networks since their launch. Certainly not being without its own faults, the Bitcoin Energy Consumption Index reports that carbon footprint of the bitcoin network is equivalent to that of the Czech Republic while consuming as much energy as the whole of Thailand. The proof of work consensus mechanism is fundamentally based on computers working together to solve complex math problems. In the original days of the bitcoin network with a limited number of users, these problems did not create an issue, when extrapolated to the 460 million Bitcoin addresses seen currently, the stress is apparent in both the transaction cost and environmental stress it places on the planet. Ethereums community, recognizing many of the issues that exist within the proof of work model, made the decision to switch to whats known as proof of stake in their three step plan mentioned above. Taking away the reliance on complex math problems as a source of security for the network, Ethereum advertises its switch to proof of stake as one that will promise increases in network speed while boasting radical decreases in the carbon footprint of the overall network.
Conclusion
Blockchain in recent years has garnered vast amounts of public attention leading to major networks like Ethereum and Bitcoin being flooded with users that the networks were not suited to handle. These networks being based on the proof of work model have demonstrated this stress in the form of both high gas and transaction fees as well as a considerable carbon footprint. Ethereums switch to proof of stake, set to launch summer of 2022, continues its three stepped plan intended to reach significant increases in scalability. As attention continues to grow for the public toward blockchain technology, projects will continue to compete with one another boasting of better network capability. Historical data shows no sign of this trend stopping and will continue to offer the public new and innovative tools in the future that will continue past global scalability.
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