Cryptocurrency scalability problem. Why popularity harms Blockchain?
Cryptocurrency developers, when creating the Blockchain ecosystem, counted on the privacy and anonymity of digital money. The goal was achieved by introducing the principle of a peer-to-peer system - each user is equal, and there is no management system and money control body like banks have. The next task is the high speed of transactions, on a par with Visa and MasterCard.
The main goal
Ten years ago, Bitcoin was not popular with users. Thus, over the years, the increase in the number of users in the system has created problems for the computing power of the technology. Using cryptocurrencies has become more difficult due to long queues due to restrictions on the number of processed payments per second. Thus the problem of scalability has become aggravated.
The developers began to actively look for optimal mechanisms for stabilizing the work. Since then, the coins have been regularly upgraded or split with no compromises. However, first things first.
The problem of scalability: the essence of the problem
All Bitcoin transactions are made in blocks, which receive transaction data. One cell contains 1 MB of information, and the average processing speed is four payments per second. On the other hand, the power of the miners is responsible for the movement of funds, the stability of the work. This is necessary for the calculation of algorithms when creating coins and records of encrypted transactions. With each transaction, digital currency miners receive a commission.
With an increase in the number of transactions, the speed of each operation also decreases. Thus, the Blockchain cannot cope with a large flow. All cryptocurrency transfers are built in a long queue. Only the high cost of the commission makes it possible to take priority in the queue. This phenomenon affects the liquidity (price fluctuations) of the coin – it is easier for the buyer to use cash or a bank card, even to the detriment of anonymity and privacy.
Users in such cases lose interest and trust in the currency, followed by miners. As a result, investors see the risk of investments and withdraw assets at their peak value and popularity, while traders play on price movements.
How the scalability problem is expressed
With the popularization of Bitcoin, the problem of cryptocurrency scalability due to network congestion appeared. Therefore, it became more difficult to use the coin – in May 2017, the transfer queues reached up to five days. So the question of the balance of speed and security of transactions was raised.
You can analyze the problem with a practical example. Suppose you need to transport 500 tons of cargo on a train with wagons with a capacity of one ton with a preliminary safety check and loading with a loader working time of 2 hours per unit. However, the cost of transportation services affects the arrangement of goods in descending order. As a result, it takes at least two weeks for the recipients with the lowest shipping charges to receive the final product. It is the same with Bitcoin – it is impossible to make payments as quickly as with a bank card.
Based on what has been written, we can single out the definition of the scalability problem – limiting the number of processed transactions in a certain period of time. However, the ability to select a paid commission can raise the priority of the operation in the Blockchain system queue, but does not solve the problem.
The first thing that comes to mind is an increase in the block size and the number of processed payments without additional measures. Unfortunately, the approach will reduce security, since the dosed processing of information avoids the high risk of DDoS attacks (Deliberate Network Overload for Fraudulent Purposes). The size is provided for a thorough check of the data. Nevertheless, it is necessary to analyze in detail the possible ways out of the situation.
Ways to solve the problem of scalability
Developers, activists, and scientists began to look for ways to solve the problem of Bitcoin’s scalability. The peak and indicative was the described situation in 2017 with long queues. It was then that the problem was widely discussed in the crypto community. Three concepts for correcting the deficiency of the Blockchain system were identified:
- an increase in the block size, thereby reducing the commission for payments and raising the speed of processing transactions per second (TPS). There are two drawbacks – the path leads to the centralization of the coin and the risk of successful DDoS attacks;
- segmented information processing or sharding. Some information is displayed outside the cells. Thus, the block is divided into two or more segments responsible for different groups of transactions. There is also a risk of hacker attacks, since less miner power is required to process shards. Due to the division into several parts, the security check requires lightweight algorithms. Thus, fraudsters can add false transactions to the network, an example is attack 1％;
- group of L2-solutions to the scalability problem. The approach is a framework, a program that runs on top of the Blockchain, which offloads an already existing network. Such concepts differ from on-chains (decisions within the coin system) by the intervention of an intermediary.
The first method requires splitting the network and creating a new coin. So there is a loss of support for backward compatibility with the original. That is, currencies in such a case no longer have homogeneity. In the cryptographic environment, the phenomenon is called a hard fork. This is the path followed by Bitcoin Cash. As a result of the split, in August 2017, there was a separation from the first cryptocurrency with an increase in the block size to 8 MB.
The second solution involves the creation of separate subnets of the block with the movement of some of the information outside of it. In this case, a soft fork occurs – a change in the software protocol without splitting the coin. Similar to the release of a patch for a computer game with additions. An example is the Segregated Witness update. The block size has increased to 2 MB with the storage of part of the information outside the main chain of transactions.
The solution has drawbacks – each shard will be at risk of a cyber attack. For each such segment, less capacity is used than for one block.
Second level solutions
The last point in solving the scalability problem is considered effective. Otherwise, the method is called second-level solutions. Means the minimum impact of the main Blockchain using an additional platform. It is necessary to analyze in detail four ways to implement the idea:
- Sidechains. The l2 solution is implemented using a third-party platform in the role of a gatekeeper (assistant in the movement of funds), which has its own tokens. The information received by the service is transmitted and recorded in the main blockchain and back at the request of the user. It all depends on the integrity of the bridge, which acts as a system for verifying transactions.
- State channels. The well-known Lightning Network can be cited as an example. It works on the principle of blocking a given amount on the user’s wallet. Also, funds are reserved on the main Blockchain for making a two-way payment. But the work does not use a coin, but IOUs between users. Only the result of the transaction between the parties is recorded in the system, which reduces the load. Thus, the solution allows you to make fast payments without commission.
- Plasma . The idea is to create a copy of the chains of the main blockchain. For implementation, hash function algorithms are used in the form of a binary tree to create clones. However, payments are controlled by smart contracts (records are kept only when the user performs any action on the wallet). The copied system can be controlled by users using the network. However, there is a drawback – long-term execution of transactions. Some transactions are carried out in the described sidechains. All default transactions are automatically confirmed unless invalidated. Any user can vote for the further movement of funds if a dubious operation is suspected. The result is a balance between speed and security.
Now the crypto community has not come to a single decision. There are still disputes, new coins are being created, protocol updates are being issued. Effective solutions have already been developed, but there is still a risk of human error. The question will be closed by the development of artificial intelligence as an intermediary of transactions.