The Blockchain Trilemma
Secure — Decentral — Scalable. These are the three properties any ideal blockchain system should possess. However, current state-of-the-art blockchain technology can only achieve two out of the three properties, which results in the so-called blockchain trilemma.
Popular blockchains such as Bitcoin and Ethereum may be secure and decentralized. Still, they cannot support a critical mass of users. Vitalik Buterin summarizes the issue of scalability as follows:
“Scalability is a big bottleneck because the Ethereum blockchain is almost full. If you’re a bigger organization, the calculus is that if we join, it will not only be more full but we will be competing with everyone for transaction space. It’s already expensive and it will be even five times more expensive because of us. There is pressure keeping people from joining.” — Vitalik Buterin (Source)
In the past days, we could observe the consequences of limited scalability in Ethereum. The graph below shows the average transaction fees of Ethereum transactions over the course of the last year. When more and more transactions compete for the limited space in blocks, the transaction fees increase. When a user chooses a low fee, his transaction might not be included in the blockchain — or only after a long waiting period.
Times of increased transaction volume that push current systems to its limits are called congestion periods, which often occur when new use cases are proposed, e.g., most recently, the decentralized finance (DeFi). DeFi extends Satoshi Nakamoto’s vision of a decentralized global payment system to fully-automated advanced financial instruments such as lending/borrowing, derivatives, securities, and many more. The full potential of DeFi is reached when different instruments are combined — joined together just like lego blocks — and executed without any human intervention, unlike traditional finance. However, these types of transactions are very complex, consume many resources, and lead to congestion by putting even more strain on the underlying blockchain system.
The case of YAM finance.
In mid-August, a new DeFi project called YAM finance launched that promised to combine innovative aspects of programmable money and governance. Even though the creators titled it as an experimental and unaudited project, it collected half a billion dollars of investments in 24 hours, bringing the Ethereum network to its knees in the process. The resulting spike in transaction fees in August can be seen in the graph above. However, the YAM experiment was very short-lived, as a critical bug was found in the smart contract within two days, bringing the value down to nearly zero. Events like this show that today’s blockchain systems cannot handle unpredictable usage spikes when only a single Dapp can bring down an entire infrastructure. A recent Bitkom study summarizes it as follows:
“Given the current bottlenecks in terms of throughput, it is highly questionable whether DeFi is viable on Ethereum” — Bitkom (Source1, 2, 3)
The underlying problems for low scalability.
A system that scales well should behave identically under low and high usage load. However, the user experience for congested blockchain systems differs considerably from non-congested systems. Users have to either pay very high transaction fees for fast confirmation or wait until the congestion dissolves, and blocks have enough space for low-value transactions.
Congestion appears whenever the number of transactions exceeds the space in the blockchain. The maximal transaction throughput of a blockchain is determined by the block size — the number of transactions that fit in one block — and the block delay — the time it takes (on average) to generate a new block.
A 2016 study found a direct tradeoff between scalability and centralization. They show that increasing the block size and reducing the block delay can improve the transaction throughput. However, tweaking these two values too drastically leads to increased centralization, especially in Proof-of-Work blockchains like Bitcoin and Ethereum. Expanding the block size leads to an increase in the network latency because transferring large blocks takes more time. And reducing the block delays means that smaller miners at the edges of the network suffer disproportionately from this high latency. This implies that large and highly-connected miners or pools get an unfair advantage.
In fact, the bottleneck of many distributed systems is the speed of how fast large amounts of data can be shared among the nodes.
Approaches to solving the scalability problem.
Blockchain scalability has been an active area of research for years. Various approaches to alleviate blockchain congestion have been proposed. In practice, however, most of them fall short of their expectations.
Stay tuned for our next blog post, where we will give an overview of existing scalability approaches beginning from changing blockchain parameters or consensus mechanics to more advanced solutions such as Perun’s virtual channels.
If you want to learn more about exciting new blockchain use cases or think that the Perun framework can help increase the scalability of your blockchain solution, feel free to contact us.
Also, check out our previous blog post about how Perun plans to overcome the scalability issue.
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