Scalability and the Future of Cryptocurrency

21 Jan 2018

Cryptocurrencies based on blockchains like Bitcoin, Ethereum, and others have taken the world by storm, showing how decentralized computing platforms can be used to create and maintain whole digital economies. Yet it's the economies of scale - the number of people using these systems - that blockchains are still struggling to solve.

 

An Inherent Flaw

Cryptocurrency innovators conceptualized the blockchain around the idea of decentralization - distributed computing that provided high levels of security and redundancy through cryptographic means. These properties are advantageous when it comes to ensuring that a financial network is highly resistant to tampering; it's something that each and every simple user guide for cryptocurrency will undoubtedly point out. However, the unfortunate side effect is that the speed of these networks, when it comes to processing transactions, is often diminished.

The consensus-based nature of most blockchains means that every node maintaining the blockchain database has to verify every transaction on its ledger. That means that blockchains are effectively capped at a relatively low number of transactions they can handle per second - despite the power of Bitcoin, for example, can easily achieve 4,000 transactions per second if it was run on a single computer, the need to have every node on the network reach consensus throttles that to a measly 7 transactions per second.

The Real-World Problem

Even with the inherent bottleneck caused by seeking consensus across an entire decentralized network, 7 transactions a second sounds like it would be sufficient for most people's needs. This was, in fact, quite clearly the case during the majority of Bitcoin's lifetime. However, once the cryptocurrency reached a new zenith of popularity in late 2017 - something that led to a major price bubble - the number of individuals interested in Bitcoin increased exponentially.

This turned out to be too much of a good thing. Transaction volume skyrocketed, causing major transaction backlogs of hours or even days, a frustrating delay when users expect transactions to last a few seconds or minutes at most. At the same time, the fee associated with each transaction on the Bitcoin blockchain, which had been minuscule up until this point, began to swell to accommodate the new demand. This, too, was a result of the inability of Bitcoin to keep up with the number of transactions on its blockchain.

A Universal Issue

While we use Bitcoin as an example, the scalability problem is an inherent one in practically every blockchain currently in use. They all work on the same distributed consensus mechanism, which means that they all suffer from the same flaw of bottlenecking if they become too popular. This means that, in the end, no contemporary blockchain is safe from scalability worries, as the more popular a blockchain gets the more likely demand will outstrip computing power.

Ethereum, for example, perhaps the second most well-known blockchain, encountered similar slowdowns in late 2017 thanks to the sudden craze for  CryptoKitties, monetized digital collectibles that grew wildly popular over the course of little over a month. Users caught up in buying, selling, trading, and breeding these little cryptographic pet rocks were using Ethereum resources to do so, causing slowdowns for those who wanted to use the blockchain for other transactions.

Failed Incremental Attempts

The greatest minds of the blockchain community have been hard at work to find answers to the problem of scalability. Some attempts at solutions have been made, but many have suffered from a lack of adoption by the widespread community or they have been too incremental to offer much in the way of relief. Options like Bitcoin's Segwit 2x hardfork, which would have doubled the size of each block in the database, also ultimately never came to pass.

The failure of Segwit 2x in late 2017 can, once again, be attributed to both the intrinsic strength and flaw of blockchain technology - decentralization. As a hardfork is essentially a new version of a blockchain's programming, a sufficient number of nodes within the blockchains consensus network need to agree to upgrade to the specific version. In the case of Segwit 2x, initial support for the hardfork slowly eroded over time as community members made the determination that the hardfork going to simply be a Band-Aid on a more serious problem.

In-Development and Future Solutions

There are, however, solutions being developed that do not require consensus approval, simply because they don't seek to alter any existing blockchain. Instead, much of the work being done to resolve scalability issues today has been centered on off-chain solutions - platforms that allow large batches of transactions to occur within a closed-loop system and then use the blockchain to "close out" these batches as one single transaction.

There are two prominent off-chain solutions being developed at the moment. For Bitcoin, there is The Lightning Network, developed by Joseph Poon and Thaddeus Dryja. Meanwhile, an Ethereum version known as The Raiden Network, developed independently, works similarly to the Bitcoin-based off-chain transaction solution, though it uses different methods to accomplish the same goals.

Looking Even Further Forward

For blockchain-based cryptocurrency systems to flourish, a solution to the complexity of scale issue needs to be developed. The only other option, which would be centralizing certain blockchains in order to reduce the amount of consensus needed to validate transactions, runs at cross-purposes to the goals of having a decentralized system - high degrees of security, transparency, and independence.

Solutions like The Lightning Network and The Raiden Network are certainly steps in the right direction. It may be that the solutions of tomorrow will have their roots in migrating transactions off the chain in batches to be re-integrated later. By the same token, a completely different solution might come from a different direction entirely. With the number of developers dedicated to solving the problem, though, it's unlikely that the scalability problem will remain unconquered for long, no matter the ultimate solution.

Author: Catherine Tims is the owner of  Ivy League Content . After receiving her Master's degree in English Language and Linguistics at the University of Arizona, she taught writing to graduate students at the University of Illinois/Champaign-Urbana. She has her own writing business, Ivy League Content, and freelances full time for business clients who need highly-researched articles.
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