Over the past few years, the number of monthly Bitcoin transactions has skyrocketed.
The problem is, the current mechanism is not sufficient to maintain these levels of growth. Right now, the state of all blockchain protocols involves every node storing all states and processing all transactions.
While this provides a high level of security, it also severely limits scalability.
Over the years, there have been many repeated attempts to scale this mechanism so that only a small subset of nodes would be required to verify each transaction.
To be a success, there must be enough nodes to verify each transaction so that security is not compromised, but few enough so that the system can process many transactions in parallel. But so far, every attempt to implement this has been unsuccessful.
Despite the appeals from developers since 2011, Bitcoin’s block size of 1MB has never increased. This limit has created a bottleneck in Bitcoin, which has led to increased transaction fees and delayed the processing of transactions.
As a result, the Bitcoin blockchain currently only supports approximately 3–7 transactions per second. To put this number into perspective, Visa’s peak is approximately 24,000 transactions per second.
Developers working on Bitcoin’s main GitHub repository are in agreement that a block size increase is necessary in order for us to use the blockchain to its full potential.
However, they have not agreed on how it should be implemented.
The Lightning Network: A Solution to Bitcoin’s Scalability Problem?
The Lightning Network is one proposed of the solutions to Bitcoin’s scalability problem and is currently under development. It uses an off-chain protocol and relies on SegWit.
Lightning wouldn’t require making updates to Bitcoin’s underlying software. Instead, it would simply involve adding an extra layer to the existing technology.
Hypothetically, it would maintain the same high security level of the current blockchain, while also allowing users to instantaneously send and receive payments. This is possible due to the fact that Lightning Network doesn’t require every individual transaction to be recorded on the blockchain.
Because transactions are kept off the main network, this protocol would also reduce transaction fees.
For example, using Lightning Network, if we wanted to open a payment channel then we could do so and record this on the blockchain at the time of creation. We could then keep it open for as long as we like, and carry out as many transactions as we’d like — without having to record anything. The only time we’d need to record anything else through the blockchain is when we close the payment channel, at which point we’d write the final status of all the transactions that occurred through this payment channel.
We can use this concept to create a network of payment channels. For example, if A and B have a payment channel open, and B and C have a payment channel open, then A can send money to C through B.
If Lightning is successful, it could be the biggest change to Bitcoin we have witnessed so far. The update would completely transform Bitcoin’s blockchain, making it possible to compete with currently established payment processors, such as Visa and PayPal.
It could even reintroduce Bitcoin as a usable daily currency that puts it on track to replace fiat.
Solving Ethereum’s Scalability Issue
Ethereum is a very different beast to Bitcoin. While the underlying technology is similar, it has very different applications.
Whereas the real value of Bitcoin lies in its currency strength, the value of Ethereum is embedded in its status as an application platform.
The Ethereum blockchain currently supports approximately 7–15 transactions per second. While this is slightly higher than the number of transactions supported by Bitcoin, it is still too low to support the future visions of Ethereum’s developers.
In a recent blog post, Vitalik Buterin, the founder of Ethereum, revealed that the network is approaching 1 million transactions per day.
“Key developers and researchers and others have always recognized scalability as perhaps the single most important key technical challenge that needs to be solved in order for blockchain applications to reach mass adoption.” — Vitalik Buterin
In fact, the Ethereum Foundation has recently announced that they will award millions in grants for scaling research.
It is hoped that these subsidies (ranging from $50,000 to $1 million) will help to incentivize developers to implement the two different proposed solutions for scaling.
There are currently two main off-chain solutions to the Ethereum scaling issue:
The Raiden Network
The Raiden Network implementation is very similar to the Lightning Network. The major difference between these two networks is that the Raiden Network supports all ERC20 tokens, whereas the Lightning Network is limited only to the transfer of BTC.
The Raiden Network proposes to scale the Ethereum network off-chain by leveraging a network of payment channels so that the blockchain is not involved in every transfer.
These off-chain transactions are faster and cheaper than on-chain transactions. They are recorded immediately, and fees are only paid for forwarding transactions between nodes.
This will make microtransactions much more feasible for the Internet of Things — a rapidly expanding market.
Plasma is another scaling network that will help the Ethereum blockchain handle much larger datasets than is currently possible.
It will continue to handle smart contracts in a similar way to how they are handled currently, except it will only broadcast completed transactions to the public Ethereum chain. Think of it as a hierarchical tree of side chains that periodically transfers information back to the root chain.
The problem with this method is that the transactions in the child chains are not validated by miners. Because there is no reward, this will ultimately mean that no one validates the transactions.
To solve this issue, penalties for breaking consensus are being written into the smart contract. If the chain is found to be fraudulent then it will collapse, and the smart contracts will not be executed.
This will save large amounts of memory and processing power, making it less expensive to interact with the system’s other participants.
The Raiden Network and Plasma are complementary to one another — Plasma can handle smart contracts, and this will trigger the Raiden Network to execute those payments. Combined, they will ultimately result in faster, cheaper transactions.
Blockchain technology has had such a huge impact on our lives that scaling it has become a necessity to ensure that growth isn’t stifled.
There is no silver bullet to solving this scalability issue, and it is likely that a combination of approaches will ultimately be used, and that the process will continue to change until peak innovation has been achieved.