For the past few years, the cryptocurrency industry has found itself divided over blockchain scalability. While the Bitcoin community has long been awaiting the public rollout of the Lightning Network, other protocols such as Ethereum have been actively developing their own on-chain scaling solutions such as Sharding. However, most of the projects that are currently in development have limited scope, in that they work only for a specific blockchain protocol. Caasiope is a notable exception, as it enables micropayments across multiple currencies.
The scalability trilemma
Since the release of Bitcoin in 2009, cryptocurrencies, and by extension, blockchains, have mainly focused on the aspects of decentralization and security. This makes sense, as a democratic economy can only succeed in a trustless and transparent environment. However, upholding these principles has come at the cost of scalability, causing today’s digital currencies to struggle under sudden increases in transaction volume.
Between November 2017 and February 2018, the cryptocurrency industry reached mainstream popularity, with most digital tokens witnessing a sudden surge in adoption. As a consequence, transactions could take several weeks to process, forcing users to pay median transfer fees of up to $11.38 per transaction on the Bitcoin network.
Since the Bitcoin blockchain has to verify new transactions with all nodes on the network, it is limited to settling between 3 and 7 transactions per second. Most other cryptocurrencies cannot offer a revolutionary improvement either, with Ethereum managing around 14 to 20 per second and Stellar promising to deliver around a thousand per second. Fiat payment processors such as Visa triumph in this regard, and can settle tens of thousands of transactions each second. For cryptocurrencies to be truly viable, they need to scale to that point and beyond, with the ultimate goal of supporting millions of transactions per second.
Since it has long been established that throughput on most blockchains is a limited and precious resource, developers have recently come up with innovative solutions to the scalability problem.
On-chain scaling: Sharding
The founder of Ethereum, Vitalik Buterin, and the Ethereum Foundation have been actively developing an on-chain scaling mechanism known as Sharding for the past year or so.
Blockchains typically verify transaction data with all nodes on the network, which can take a very long time depending on the number of participants. To remedy this, Sharding proposes that only a subset of all nodes be made responsible for transaction verification. The system’s only requirement lies in the existence of sufficiently many nodes to ensure that consensus is reached.
Sharding creates groups of nodes that are each responsible for transactions initiated from a given wallet address range. For instance, a sharding scheme can create one shard to handle addresses starting with 0x00, while another can be created for 0x01. Since discrete groups of nodes are now simultaneously processing transactions, the scalability achieved can be considered to be proportional to the number of shards in existence.
By integrating Sharding and migrating to a Proof of Stake-based consensus mechanism, Ethereum developers hope to scale the network while still maintaining the aspects of security and decentralization. However, sharding can make the underlying network topology rather complex and does introduce the risk of single-shard takeover attacks.
Second layer scaling
Instead of scaling directly at the blockchain level, second layer scaling solutions such as the Lightning Network can greatly increase transaction throughput without involving the mainchain at all. In such a scenario, both parties can reach consensus without a governing authority, or list of nodes. Similar to how cash-based transactions in the offline realm do not require a central bank, users can finalize the transaction amongst themselves .
Second layer scaling solutions such as the Lightning and Raiden Networks primarily reduce transfer costs and take a fraction of the time to finalize, making them ideal for micropayments. Transactions involving larger denominations can still use the main blockchain for guaranteed security. This way the principles of decentralization, security and censorship-resistance are still upheld.
Payment channels: The Lightning Network
The Lightning Network is one of the most prominent second layer scaling solutions available for the Bitcoin blockchain. It leverages the concept of payment channels to enable fast transactions without broadcasting them to the network. When the two parties need to close the channel for finality, the final balances are recorded and updated as a single entry on the blockchain.
As an increasing number of payment channels are created on the Lightning Network, users can also send their funds through existing channels. Like packets on the internet, the network has been designed so that payments ultimately reach the desired destination regardless of the path taken. This gives users the ability to send funds via pre-existing channels, and abstracts the complexity of creating a new payment channel for each merchant.
The Caasiope Network
While the Lightning Network works well for scaling Bitcoin and potentially the Litecoin blockchain, it cannot be adapted or used with any other cryptocurrency. The same is true for most other scaling solutions that are currently in development, including Ethereum’s Raiden Network and Sharding.
The Caasiope Network, on the other hand, is a second layer scaling solution that is designed to be completely blockchain-agnostic. Serving as an independent blockchain, the network can secure and track ownership of multiple crypto assets. As a result, Caasiope can improve the throughput of several cryptocurrencies at once. The protocol is particularly useful for micropayments, since it is built on the premise of facilitating cheap and instant transfers.
The Caasiope Network can also enable peer to peer exchange of cryptocurrencies, which circumvents the need for a third party entirely.
This article is a short version of an article originally published on Caasiope.net