ZTX Explained: Blockchain State Management and the Scalability Problem (Or How to Grow Crypto to Billions of Users)
This is the second article in an ongoing series about how our native cryptocurrency, ZTX, will function within the ecosystem of products and services we’re building to support our mission of bringing cryptocurrency access to the world. We’ll explore some of the main issues facing the blockchain industry, and in particular, we’ll discuss how we’re building real solutions to help stimulate widespread adoption.
In Part 1, we discussed one fundamental challenge for widespread cryptocurrency adoption: institutional support, and how our design for ZTX and the broader Zulu Republic ecosystem will help address that challenge.
In this article, we’ll move on to another fundamental challenge for adoption: scalability. In particular, we’ll look at the limitations of public blockchains in terms of state management, and how off-chain solutions can help mitigate those limitations.
What is state management?
In order to understand why public blockchains like the Bitcoin blockchain are limited in their ability to scale, it’s important to have a basic understanding of how they record and update data (in the case of a payment-oriented blockchain like Bitcoin, this data takes the form of transactions and their associated metadata). As complex as blockchains may sound, you can think of the way they store data as basically like a spreadsheet database containing a list of all transactions, similar to what you would use in Excel. The contents of that spreadsheet at any given time would be referred to as the “state” of that database. So, in this sense, “state management” is simply the process of updating that data with new transactions and recording it for everyone to see.
However, the data recorded in blockchains is immutable, meaning it can’t be edited. This makes the information incredibly secure from tampering, but it also means that, whenever you want to add new transactions to the blockchain, you can’t just go in and edit the values like you can in an Excel spreadsheet. Instead, you have to create a completely new ‘spreadsheet’ and append it to the previous one. Because of this, as the list of transactions recorded on the blockchain gets longer and longer, the size of that data grows exponentially, slowing down the network more and more over time.
So, with decentralization and a high level of security comes a tradeoff in terms of processing speed and scalability. By processing every single transaction “on-chain” in this way, we have robust security with no need for intermediaries (i.e. banks), but we have a low efficiency in terms of speed and network congestion, making the system (in its current design) impractical for frequent, everyday transactions on the level of mass adoption. This is especially true for low-value transactions, as the required transaction fee can at times be high enough to make such transactions not worth while.
Side chains? State channels? Lightning networks? What’s it all about?
In order to mitigate these limitations, a number of solutions have been designed and proposed, including what are known as side chains, state channels, and the lightning network. The technical specificities of how each of these solutions function differs from one to the next, but the basic premise is this:
Do we really need to record every single transaction on the main blockchain in real time? Or might it be more efficient to process a majority of transactions, especially lower value ones, “off chain” and only periodically reconcile that data with the main network?
Despite the differences in technical execution of these various solutions, they can be referred to generically as “off chain state management” systems, meaning that much of the data processing takes place away from the main blockchain in order to increase efficiency and lower fees, while maintaining the security of having the data periodically recorded onto the blockchain.
Off-chain state management and ZTX
Indeed, this is exactly the problem we’re working to solve. The ecosystem that we’re designing for ZTX and the Zulu Republic Passport is based on our own novel off-chain management system. Our goals for this system are to increase the efficiency of cryptocurrency payments and digital identity management while also reducing fees and maintaining security.
Ultimately, our vision for this ecosystem is to provide instant, low fee transactions in a way that maintains as much decentralization as possible, and while still providing the security of state-of-the-art encryption based on the Ethereum network. And of course, a key element of this infrastructure will be its scalability. By moving a majority of transactions off chain, we can accommodate a much higher number of users transacting at the frequency of everyday payments: a coffee here, a new outfit there, an invoice payment, a tip for service, or even a bus ticket.
This is how adoption starts. And it’s how we’ll grow cryptocurrency from a small niche market to eventually rival the billions of users and transactions of traditional payments processors.
For more on how we’re designing our off-chain state management solution, stay tuned for further details in future articles in this series.