Bitcoin’s scalability issues appear to be interminable. It has been claimed that other digital currencies, like Ethereum, can overcome such challenges with scalability, but has this actually been the case? This short read will address all of these questions.
To put it simply, a decentralized and distributed ledger used to record internet transactions is what most people put into the term “blockchain”. Imagine a bank ledger where all transactions are recorded and shared with the public. An overview of the characteristics of this technology will help you better comprehend what blockchain implies.
- Immutability. What comes to mind when you hear the word “immutable” is the idea of being unable to change or modify something. It is impossible to edit or manipulate data that have already been entered into the blockchain database. In contrast to traditional ledgers, blockchains are immutable, which means that once a transaction is validated by multiple nodes, it can no longer be changed or manipulated because it has been added to the public ledger, and no one can go back and change or delete the transaction. This makes blockchains more secure.
- Decentralization. No bank, any other institution, or government has authority over blockchain since it is decentralized. And this means it cannot be manipulated. There is no central entity that handles transactions; instead, they are sent, received, and validated by individuals and through a network of nodes.
- Transparency. Because an open ledger implies transparency, every transaction on the blockchain is recorded and available to anybody who wants to inspect it. In this way, a sender can’t claim to have sent a transaction that never took place. It’s just like how a recipient can’t claim that they never received a transaction because the transaction was confirmed and logged on the blockchain after it was sent.
- Security. In terms of security, cryptography is used to protect the blockchain, and it is from this that the term “cryptocurrency” derives. Every block is identified by a unique hash, and each block is linked to the preceding block in a way that makes it impossible to alter.
Consider scalability in terms of a system’s capacity to handle and process a large volume of transactions. The scalability of a blockchain is the number of transactions it can handle. TPS (transaction per second) is the most often used term. The bitcoin blockchain can handle roughly seven transactions per second, but the Ethereum blockchain can process about 20 transactions per second.
For a blockchain with more than 70 million users, 7 TPS is considered low. However, what if a blockchain has more transactions than it can allow per second? The transaction with the biggest gas fee will be processed first, which slows down the pace of all subsequent transactions. Ethereum’s high gas fees are due to this same reason. It’s the same as trying to do too many things at once on a computer with just 1GB RAM. The machine will run slower than usual until the user adds more.
Poor Scalability and Its Effects
It takes 10 minutes for a Bitcoin transaction to be processed, which is rather sluggish compared to other methods of sending funds. When the network becomes overburdened due to the lack of scalability, the confirmation time will also rise.
When the network becomes overburdened, senders will be forced to pay higher gas fees in order to have their transactions completed more quickly, which is another drawback of a low-scaled blockchain. Faster confirmation will be given to transactions involving high gas fees. There are methods to cut costs in certain cases, however, the transaction will be delayed if the priority is set to low when transferring from a wallet or exchange.
When mining blocks, miners face obstacles that need additional processing power and resources, which might end up costing miners more money. This is the reason why they prefer mining in nations where power costs are low.
What Can Be Done with Poor Scalability?
It’s not uncommon for people and organizations to come up with solutions to existing problems. Off-chain and on-chain scaling solutions are a few of the options available.
This requires the creation of a new Blockchain-based protocol. Think of this as an addition to the chain that already exists. Off-chain transactions do not remain on the main chain, allowing both a sender and a recipient to conduct transactions without bloating the chain. Off-chain solutions can be compared to the construction of a new coach on a school bus; kids in the main coach are unaware of or unaffected by events occurring in the higher coach. Sidechains, sharding, and payment channels are all examples of off-chain solutions.
To increase blockchain efficiency and scalability, sharding involves separating nodes into several shards, each of which contains a portion of the transaction. If this is done, the TPS of Ethereum can rise from 20 to roughly 100,000 transactions per second, according to Ethereum 2.0.
Instead, a sidechain involves a blockchain that is linked to the primary chain. In this case, transactions can flow freely between the main and the side chain.
Bitcoin Lightning Network is an example of a payment channel that requires both parties to be online for the transaction to be completed.
Off-chain alternatives, despite their drawbacks, can be utilized to avoid excessive transaction fees and a crowded network while also facilitating transaction processing.
Increasing the size of each block is how on-chain solutions are created. There are around 1 MB blocks on the Bitcoin network. An on-chain solution to poor scalability is to increase its size.
Some of the activities that are connected to on-chain solutions include key aggregation, small schnorr signatures, and speedier blocks. But despite their effectiveness in solving scalability issues, they have certain cons such as the possibility of forking and increasing the expense of chain maintenance.