Collapse of the big blockchains on the horizon —no doubt
Why booming tokenization will wipe out your favourite chains. Mind the gap!
Tokenization is one of the most promising future applications for blockchains. In 2021, the market for tokenized assets is already about 2 trillion USD. By 2027, this market is expected to make up 10% of GDP, or 24 trillion USD. Use cases for tokenization are almost limitless across all industries as well as in the non-business world.
To audit how the existing big blockchains would perform in such a tokenized world, we can start with a simple use case:
Every month, a company makes a (revenue) pay-out to whoever holds the token in that particular moment.
We can now build five scenarios around this assumption. To keep the scenarios simple, only two dimensions serve as variables:
(1) Total number of different tokens issued and
(2) average number of holders per token.
Now, only the first variable (number of different tokens) is changed repeatedly by a factor of 10 to derive the number of transactions that must be handled by a blockchain:
For the above simulations, we assume that every holder should receive only one payment to their account/address every month.
The results are striking:
When trying to handle the above scenarios under this simple use case, the existing big blockchains will collapse one after another. The blockchains´ TPSs (transactions per second) are just not high enough. The results are even more dramatic in more complex — and more realistic — use cases.
The underlying problem
Verifying the above analysis is simple and can be done by anyone: (1) Take the maximum number of monthly transactions each blockchain promises to deliver and (2) divide it by the number of transactions necessary to fulfill one payment per token holder per month for the given number of tokens. The result provides the percentage of the total blockchain capacity that would be required.
For the calculations in this paper, we used the following information which was either provided by the chains themselves or derived from expert estimates:
● Ethereum promises about 13 transactions per second (Source: ETH explorer with TPS). This leads to around 34 million transactions per month — which is already insufficient for scenario 2, which requires 100 million payments per month.
● BSC promises about 63 transactions per second (Source: TPS BSC and Solana and BSC Chart daily Tx). This implies around 162 million transactions per month — which is not enough for scenario 3, as it requires 1 billion payments per month.
● Cardano promises about 257 transactions per second (Source: Cardano TPS from CMC), equivalent to around 692 million transactions per month — also inadequate for scenario 3, which requires 1 billion payments per month.
● Solana promises up to 50,000 transactions per second, but this was never seen on the main net (Source: Solana TPS ). The actual average is closer to 30,000 transactions per second. This calculates to around 77.7 billion transactions per month — which makes Solana the only blockchain out of the top 10 to cover at least scenario 4.
Another point to consider: For the examples above, there is a correlation between a blockchain’s capacity to handle transactions and the hardware requirements to run a node. The higher the capacity, the higher the hardware requirements and the associated costs of installation and maintenance. Solana, for example, handles about 30,000 transactions per second. However, to accomplish this, nodes need a setup with 32vCPUs,128GB RAM, 2048 GB SSD. This requires either a one-time investment of around USD 7,100 (source: Solana Hardware) or a rental fee of around USD 210 per month (source: RISE-4 Solana). Both setups require additional spending on maintenance. Obviously, total cost of participation in this dimension will come at a cost to decentralization and consequently security of the blockchain.
In contrast to the above, the requirements for Signum node providers are very modest. A setup of only 2 vCPU, 2 GB RAM, 20 GB HD is necessary for a full node, which corresponds to an initial investment of only USD 140 (Source: Signum Hardware). If rented, the setup would incur monthly costs of only USD 11 (Source: Essential Signum). This of course makes the technology very inclusive, i.e. accessible to people in lower-income regions, which in turn fosters decentralization and hence security. This is a (sometimes forgotten) core principle of the blockchain concept in general.
The root cause for the predicted collapse of the currently dominant blockchains lies in their fundamental technological concept. In short, the logic is as follows:
- Tokens are not native elements of the platforms. They are created and managed through smart contracts. Every smart contract needs to be deployed on-chain. The original code takes up space and needs to be stored forever on every node. The result: a tremendous amount of duplicated code is deployed and stored on the blockchain.
- Handling simple operations like a token transfer by smart contracts leads to a huge increase in required blockchain space and effort when interacting with tokens.
- The result: blockchains get overloaded very quickly and/or the technical requirements to run a node become very high (which can lead to centralization).
In addition, there are operational and economic downsides:
On the operation side, the big problem is that specialized software engineers are needed to review and deploy the smart contracts. These developers are rare, expensive to hire, and hard to keep. Furthermore, there are numerous challenges around quality control as every contract is developed individually. On top, trust is an issue as the code is not easily reviewable by the publisher, e.g. with regards to back doors. And this is not just a theoretical problem: With a little research, everyone can see that in the past 12 months there have been many cases of token fraud or alleged hacks (recent example click here).
From an economic perspective, these technical and operational complications result in high costs of operating tokens. The whole token creation process (including hiring, coding, etc.) requires a substantial investment of time and money. Because one transaction is run per token and holder, transaction fees rack up very quickly. Attempting to mitigate these risks is very costly, as there are no ready-to-use tokens and complexity can increase quickly (not to mention the token hacks that are frequently reported).
The Signum blockchain allows for many different transaction types besides the standard money transfer or smart contract execution. Some of these smart transactions can trigger multiple balance updates. This method gives users the convenience of the classical layer 1 approach, but at a much higher efficiency that is typically achieved only with layer 2 solutions. So in order to properly compare these so-called smart transactions with regular transactions, we introduced a new KPI which we call ‘smart transactions per second’, or STPS.
The first transaction to benefit from STPS was Signum’s multi-out payment in 2018. This transaction type enabled the Signum chain to conduct a pay-out up to 128 recipients in one transaction. This pushes the STPS from 1,020 to 19,200 per block (new block every 4 minutes). This increased the regular capacity from 4.25 TPS to 80 TPS for a given block size of only 179,520 bytes.
In June 2022, Signum introduced a STPS which is over 1,000x higher and can therefore cover the token distribution volumes in our scenarios 4 and 5. This is accomplished by a smart transaction that distributes revenue, pro rata, to all token holders in a single transaction that takes less than 200 bytes of blockchain space!
For comparison: A simple Bitcoin money transfer transaction usually takes up more than 200 bytes. And this is just a very basic event. All details around Signum’s massive upgrade with the Hard Fork Rainbow can be read here.
This means that Signum is the only blockchain that is able to handle all the scenarios we sketched out in our basic use case:
Signum provides this capacity by using the existing block size and the new transactions from Signum’s SIP-33. Future developments will expand this capability even more, i.e. by introducing new smart transactions with high STPS, reducing the amount of data on the blockchain needed per transaction (like the green contracts recently introduced with SIP-30). Finally, an increase of block size is also possible but might be prioritized downstream while development focuses on smart solutions instead of brute force by larger blocks and higher node requirements.
The big technological difference between Signum and other blockchains — which is very hard to replicate — can be summed up as follows:
- Tokens are native on the chain rather than smart contracts.
- Signum uses an account-based logic and not the unspent transaction output (UTXO) standard.
- There are many special (smart) transaction types, e.g. one for paying out revenue to multiple token holders in a single transaction, which scales very efficiently without bloating the chain.
Furthermore, the common operational and economic challenges discussed above do not apply to Signum:
As Signum provides tokens as a native element on it’s chain, creation is covered by only one transaction. Please see an example transaction here which results in this token here, ready to use from the block of creation. The cost of creating a token is 150 Signa, which is currently less than USD 0.70.
- Distribution of Tokens
As Signum is account-based, a token can be transferred hassle free to any account on the chain with just one click. It’s as easy as sending an email. Example: Distributing a specific dividend-token to 10,327 different holders can already be done within less than 2 hours (see Signum Testnet). The transfers were processed from block 376,611 to 376,638, which took 1hr 48min and cost around 100 Signa (approx. USD 0.60). Note that this is only the initial distribution of tokens! The speed to perform the recurring payouts of the token related dividends is much faster. In fact, it is on a completely different speed level (see next point).
- Distribution of Dividend
To demonstrate that the Signum blockchain can cover scenario 4 in our example above, we repeated sending a dividend to the 10,327 holders in one block more than 90 times — a mere 9% usage of our TPS. Please view these transactions on the chain here (101 times) and here (93 times). The distribution into the respective accounts of any of these 10,327 holders can be seen here. Overall, the chain updated holders’ balance changes more than 2 million times in under 2 minutes!
Finally, it is worth mentioning that Signum is a truly green and decentralized blockchain with no ICO or pre-mine. It is an open source project based on a philosophy of creating cutting edge technology that addresses many of the common problems around trading and security (see more on Signum’s native liquidity pools here). All innovations are kept in line the core principles of blockchains, i.e. decentralization, resistance to censorship, and global availability.
Comparison Ethereum vs. Solana vs. Signum
Given the similarity of Signum and Solana in terms of transactional capacity, we will provide a short comparison of these two open source projects. We also include Ethereum for additional context. Due to substantial differences in technical details and capabilities of these blockchains, this overview can only be a starting point for further exploration of Signum’s unique technology.
Before jumping into the comparison, a quick note on Signum’s consensus — a high quality feature, given the ubiquitous discussions around sustainability and decentralization in the blockchain world:
Since it’s inception in 2014, Signum has been green. It’s current version Proof of Commitment (PoC+) uses available disk space in combination with staking. The mining process for PoC+ is so effective and has such low hardware requirements that any consumer-grade PC can be used. The big implication is that basically anyone with a hard drive can join the network. The very low cost of participation invites a large number of validators, which makes for substantial decentralization and high security.
For comparison: Solana uses Proof of History (PoH), which needs a hardware setup similar to Ethereum’s. The core problem is that meaningful participation presupposes an investment of several thousand dollars in (specialized) equipment. This of course decreases the group of potential validators significantly and undermines decentralization.
Remarks on Market Capitalization
Although this paper focuses mainly on technical aspects, it is worth also considering the commercial side — if only to preempt the potential argument ‘If Signum is as great as you say, why is it’s market cap so low?’.
Here is our thinking on this (which of course is not intended as financial advice whatsoever):
Solana has been the most recent shooting star when it comes to growing an ecosystem and increasing market cap of its cryptocurrency SOL. Within less than two years, SOL went from around USD 0.60 in early 2020 to it’s peak of USD 259.0 in November 2021, increasing nearly 430x. Like other projects, Solana has benefited from a virtuous cycle in which price increases attract attention and projects, leading another price increase, and so on.
Signum in contrast has not even really become the new kid on the block yet. Almost no one has ever heard of it. The price of it’s coin SIGNA is therefore still extremely low (but already higher than SOL just 18 months ago, see below). This is because Signum is a complete makeover of a pioneer blockchain. Its underlying technology has proven successful since 2014, but the complete technological overhaul and re-branding have only just been completed very recently.
There are many reasons why Signum might see a dynamic similar to Solana’s, the most important of which are as follows:
- Signum has a sophisticated technology which offers a unique platform for a tokenized world. As argued in this paper, Signum has developed cutting edge solutions to significant technical problems. A comprehensive discussion of all of Signum’s capabilities is beyond the scope of this paper; please visit Signum’s website to learn more.
- Almost nobody in the blockchain space has taken note of Signum/Signa yet. As a direct consequence, there are only a very small number of projects running on the chain — and therefore very little demand for Signa from the developer and investor community. However, that could change overnight once Signum installs professional marketing and PR capacities. And as with Solana, this push in public awareness will most likely start a virtuous cycle that will be reflected in the price of Signa.
- Signum is pursuing the strategy of becoming a major building block in a multi-blockchain world. Connectivity will therefore always be a major element of the product roadmap. This ecosystem strategy will lead to the integration of Signum into many existing projects around the world — no need to start from zero ourselves.
From an investor’s perspective, the above leads to the following line of thought: As this project is not yet widely known, none of its future potential is currently priced into SIGNA. And considering that Solana went from a market cap of 4 million USD (May 2020) to 75 billion USD (November 2021) within 18 months (!), there seems to be a lot of potential for Signum/Signa.
Today, Signum/Signa has a market cap of around 10 million USD, which is 2x that of Solana just 18 months ago. If Signum now becomes more and more visible to the world, Signa might see a massive value increase as well. If Signum shows just 20% of the dynamic that Solana experienced, Signa’s market cap could go from 10 million USD to 1.2 billion USD (120x compared to Solana’s 430x).
So the short answer to our initial question ‘If Signum is as great as stated, why is it’s market cap so low?’ might simply be ‘Because nobody knows about it yet’.
In this paper, we exhibit our calculations concerning the behavior of ‘big blockchain’ once tokenization becomes mainstream and the number of associated transactions increase to multiples of today’s levels. The core findings are
- Today’s big blockchains were not built to run transaction tokens at scale
- We expect these blockchains to crash as soon as large amounts tokens are deployed
- Signum’s technology overcomes the shortcomings of the established blockchains
- Signum’s approach centers around ‘native tokens’ which are green, smart, and efficient
- Signum’s leading capabilities can easily be verified with just a few basic calculations
- Given the above, Signum is in a prime position to take the lead in a USD 24 trillion market
About the Author(s)
The lead author of this paper is Benjamin Schroeter, president of the Signum Network Association (SNA), Switzerland. SNA was founded in 2021 as a not for profit organization to pave the way for marketing Signum. Read the latest open letter from the SNA here. Benjamin is a German serial tech entrepreneur and is invested in several European tech and gaming companies.
Multiple people within the inner circle of the Signum opensource project have made invaluable contributions to this paper — thank you all!
Signum is the world’s first truly sustainable blockchain, featuring world-class applications on a sustainable leading-edge blockchain architecture. Compared to other cryptocurrencies, Signum powers its native cryptocurrency Signa (SIGNA) with a minor fraction of energy use and e-waste. Signum empowers users and developers around the world with innovative blockchain solutions for everyday life.
SNA is a Swiss Not-for-Profit Organization founded in 2021 to provide a solid foundation for Signum to grow and fulfill its vision of sustainability and innovation in blockchain technology.