Introduction
Blockchain networks must become extremely scalable in order to compete with conventional payment processing systems, capable of tolerating an exponentially expanding number of users, transactions, and data.
The Blockchain Trilemma is a unique difficulty in the field of blockchains:
Image source: quora.com
Blockchains are frequently forced to make trade-offs that prohibit them from attaining all three of their goals: decentralization, security, and scalability.
A blockchain ecosystem may be scaled in two ways. First, you may increase the transaction capacity of the blockchain itself (L-1 scaling). Second, you may alter how you utilize the blockchain, and instead of placing all activity directly on the blockchain, users perform the majority of their activities off-chain (L-2 scaling).
As a result, a variety of approaches are already being developed or deployed to improve the scalability of blockchain networks. Scalability is handled in two ways in these methods: layer-1 scaling solutions and layer-2 scaling solutions.
Layer-1 Scaling
In the decentralized ecosystem, Layer-1 refers to blockchain protocols like Bitcoin, Ethereum or Avalanche. There are a number of methods currently in development or practice that seek to improve the scalability of Layer-1 blockchain networks directly, but each not without its own disadvantages.
Sharding
Image source: genesisblockhk.com
Sharding breaks transactions into smaller data-sets called “shards.” These shards are simultaneously processed in parallel by the network, allowing for sequential work on numerous transactions simultaneously.
The increase in transaction throughput is theoretically proportional to the number of shards. This would imply that if there are ten shards, the throughput would be roughly ten times higher.
However, it has a distinct disadvantage. Instead of each network node holding a copy of every block from inception to the present, sharding allows this information to be partitioned and kept by other nodes while being consistent with itself. This creates a security issue since compromising the nodes in a particular shard results in the irreversible loss of the corresponding chunk of data.
Protocol Improvements
Image source: consensys.net
Change in consensus method by migrating from the intrinsically slow Proof-of-Work system to Proof-of-Stake, which is meant to replace the requirement for resource-intensive mining with validators who stake the network’s native token. This will significantly and fundamentally boost the network’s throughput capacity.
The disadvantage of Proof-of-Stake is that it is not as secure as Proof-of-Work; and validators that acquire large holdings could have excessive influence on transaction verification. Practically speaking, it’s significantly easier to obtain a large amount of stake rather than massive amounts of hardware and energy required in order to mine blocks and attempt to take control over proof-of-work blockchain.
Layer-2 Scaling
Layer 2 refers to a network or technology that operates atop of an underlying blockchain protocol to improve its scalability and efficiency. For instance, Bitcoin is a Layer-1 protocol, and the Lightning Network is a Layer-2 solution built to improve transaction speeds on the Bitcoin network.
Rollups — Zero Knowledge Proof and Optimistic
Rollups Explained
Image source: ethereum.org
On smart chains, for example Ethereum network, transactions and data, such as smart contracts, can both be posted on the blockchain.
However, block size on Ethereum are limited and only have a room for around 500 transactions, although the exact number is dependent on the complexity of those transactions. If the demand is considerably higher per block, the transactions chosen to go into those blocks are generally chosen on a very simple criterion: who pays most gets in. This means the other transactions will have to wait, with fees going up.
This is where rollups come into play. A rollup is a solution that performs transaction execution outside the main Ethereum chain but then posts final transaction as data on the main chain.
This means, given the above scenario, we can include bunch of transactions inside one data. For example, if one data in the block could represent 10 transactions, we now have scaled to 5,000 transactions per block. Hence, rollups are ‘rolling up’ transactions into a piece of data to submit onto blockchain, instead of singular entries, saving space and speeding up the transactions per second time (TPS).
Rollups — Zero Knowledge Proofs
ZK rollups run a computation off chain and submits that computation as validity proof to layer-1 blockchain. Validity proof means that all the transactions were checked and found to be safe and not fraudulent. Such computation is undertaken as ‘work’ by a checker, similar to Proof-of-Work, and then submitted with the list of transactions and with proof to the Layer-1 blockchain.
This way blockchain offloaded some of its work to ZK rollups.
One drawback of ZK rollups is that validity proofs are intense to compute — not worth it for applications with little on-chain activity. Another drawback is ability of an operator to influence transaction ordering.
Rollups — Optimistic
Optimistic rollups would assume transactions are good and valid by default and approve them onto Layer-1 blockchain. Optimistic rollups use ‘fraud proof’, and whatever data they post is fact checkable. Participants get penalized for conducting fraud and reimbursed for proving fraud.
On the downside, there are long wait times for on-chain transactions due to potential fraud challenges, as well as operator’s ability to influence transaction ordering.
Sidechains
Image source: academy.horizen.io
A sidechain is a transactional chain that works independently of the blockchain. It features its own consensus mechanism, which may be adjusted for speed and scalability in comparison to the original blockchain. A two-way bridge connects sidechains to the original blockchain.
The fact that a sidechain operates in the same way as the original blockchain, as it’s based on main chain’s virtual machine, makes it extremely appealing. This implies that if you wish to run your Dapp (decentralized application) on a sidechain, all you have to do is deploy your code to that sidechain. It has the same look, feel, and behavior as the main blockchain.
The main disadvantages are that sidechains are less decentralized and a quorum of sidechain validators could possibly commit fraud.
Nested Blockchains
A nested blockchain is a decentralized network infrastructure that uses a primary blockchain to specify parameters, while executions take place on a web of subsidiary chains that are linked. Because they are effectively smaller clones of the main blockchain, these networks are also referred to as “child” chains. The parent chain delegates work to child chains, which is returned to the parent once completed. Unless a dispute resolution is required, the underlying base blockchain does not participate in network services.
However, these heavily rely on one or more operators to store data and serve it upon request.
State Channels
Image source: cvj.ch (crypto valley journal)
A state channel enables two-way communication between a blockchain and off-chain transactional channels by employing a variety of strategies to increase overall transaction capacity and speed. Participants can use state channels to transact x times off-chain while only submitting two on-chain transactions to the main blockchain. This enables incredibly fast transaction throughput.
On the flip side state channels lose some degree of decentralization in order to attain higher scalability. Furthermore, the capabilities of state channels are limited. State channels cannot be used to move payments off-chain to non-participants.
Summary
Although the blockchain trilemma is a barrier to blockchain adoption, solutions are emerging to achieve an effective and simultaneous balance between network security, decentralization, and scalability by utilizing Layer-1 and Layer-2 scaling solutions. Many blockchain networks are experimenting with combining Layer-1 and Layer-2 scaling solutions to achieve improved scalability without losing appropriate security or decentralization.
DISCLAIMER: The information contained in this article is for educational purposes only and does not constitute any form of advice or recommendation by Wheatstones, and is not intended to be relied upon by users in making (or refraining from making) any investment decisions.
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