Network Layering: the solution to high transaction fees
In the cybersphere, there is always room for improvement. Where cryptocurrency is concerned, there are many aspects in need of innovative solutions. But one of the main challenges for overall optimization is the efficiency and cost of transactions.
Most popular cryptocurrencies still rely on a consensus mechanism known as Proof of Work (PoW). This mechanism was designed to ensure the legitimacy of transfers. Motivated by transaction fees, the network’s members verify every transaction. However, the process is often time-consuming and expensive.
For example, Bitcoin’s current average confirmation time is 56.33 minutes. This doesn’t sound like a long time compared to the clearance times banks offer their clients, but time is money, and the quicker the better. And remember, this is only the average. The busier the network, the longer the confirmation time.
Network limitations
It is possible to send large amounts of cryptocurrency safely to another part of the world within 10 minutes. However, network members need to consider transaction congestion. The maximum size of a Bitcoin block is set at 1Mb. This is an average of around 2,000 transactions per block. In December 2020, there were around 330,000 daily transactions made using Bitcoin. This number grew to approximately 400,000 in early January 2021.
Naturally, there is a lot of competition for block space. Members of the network can always pay a greater fee for a quicker transaction, but this can get expensive. The total gas fees paid for popular DApps on the Ethereum platform ranged between USD 43,700 and USD 2 million during the whole of April 2021. Members either unwilling or unable to pay the fees must simply wait.
This is a problem for common cryptocurrency users, not only those using Bitcoin. Ethereum, for example, also operates with a PoW consensus mechanism; although, it is currently implementing a Proof of Stake (PoS) upgrade (more on staking later).
But enough about the problem. What are the solutions?
The need for speed
As is often the case today, increased efficiency is the answer. The quicker the network can process transactions, the less congested it will be. Without the congestion, there will be less competition for those quicker transactions. And without the competition for transactions, there will be no reason to charge those higher fees. Increased efficiency will essentially level the playing field for everyone. But where will all this extra speed come from?
Current and upcoming solutions
Alternative consensus mechanisms
Newer cryptocurrencies have a slight advantage at the moment. Unlike well-established players like Bitcoin and Ethereum, more recent projects are based on transaction verification mechanisms like PoS, Delegated PoS, Delayed PoW, and Proof of History (PoH). These mechanisms have shown results that tend to be both faster and cheaper than the traditional PoW. However, the security of these solutions has not been fully tested on the same large, decentralized scale as Bitcoin and Ethereum.
Sharding
One way cryptocurrencies might overcome the challenge of quicker transactions is to utilize a concept known as sharding. In essence, it facilitates the partitioning of computing power and storage on a Peer-to-Peer (P2P) network. This means individual nodes are not overburdened with the network’s entire transaction load. Rather, a node only needs to manage the portioned information in its shard.
- Ethereum 2.0
Sharding is now being explored by Ethereum. The long-awaited Ethereum 2.0 aims to solve the network’s transaction congestion and scalability issues. According to Vitalik Buterin, the creator of Ethereum, this software upgrade is expected to turn 15 transfers per second (tps) into a staggering 100,000 tps. Essentially, the upgrade aims to create multiple shards or 64 shard blockchains running parallelly over the main blockchain. This will dramatically increase the network’s handling capacity.
Layering
Another solution to achieve quicker transactions is to make use of layering. Creating an additional layer on a blockchain network makes it possible to free up space in the first layer. Operations that would usually occur on Layer 1 of a blockchain network can now be completed without time-consuming miner verification and fees. Bitcoin is currently exploring this approach.
- Bitcoin’s Lightning Network
Bitcoin is now beta testing a Layer 2 solution that sits on the blockchain it created in 2018. The purpose of this layer is to improve the scalability of transactions in the network. In brief, this solution takes the transactions happening off the blockchain through individual bidirectional payment channels and connects them back to the blockchain through an in-built smart contract functionality. This solution is expected to scale up to an incredible 1 million tps and beyond.
ELCASH
Unlike many cryptocurrencies that are now merely adapting to overcoming transaction congestion and high fees, ELCASH was created with these issues in mind. The coin’s architecture was designed to be a decentralized, fast payment protocol. Additionally, ELCASH employs a different approach by using staking as a possible way of eliminating transaction fees altogether.
Stakers earn a reward for locking some of their ELCASH, taking it out of circulation. They generate a “free transaction limit” to spend. The general transaction fee is applied to all transactions; however, depending on the user’s individual limits, the transaction costs are returned to them.
Normal transaction fees are charged in advance and then returned to the spending wallets of those eligible. To participate, users only need to stake ELCASH. The free transaction limit is calculated every day and depends on the user’s staking parameters.
The way this is designed helps to secure the network against malicious overflooding, making attacks expensive and reserving free transactions for genuine users. Miners are not burdened with additional work without a reward. If a free transaction is to be made, mining difficulty is automatically lowered in proportion to the free transaction value included in the block. As a result, the miners’ total and final block rewards will not be at all affected by the free transactions, and their additional work will be rewarded accordingly.
Created by Eyal Avramovich, ELCASH’s main feature is a process-dedicated Layer 2, enabling faster and cheaper transfers. This makes it ideal for quick, everyday purchases. Quicker transactions are achieved through the fast transactions layer, which is built upon the main blockchain. The transactions are propagated to the main blockchain using Layer 2, where they are confirmed off the chain before being approved by the PoW miners.
For more details on ELCASH’s transactions protocol, check out the whitepaper published in 2021.
Takeaway
There are many solutions to high transaction fees now being explored. Of all the options now in development, network layering appears to be the most common. The reason for this is simple: a less busy Layer 1 enables optimized processes. Networks with a Layer 2 will be able to liberate the miners working on Layer 1, which in turn means quicker and cheaper transactions for all.
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Twitter: https://twitter.com/elcash_official
