Satoshi Nakamoto’s Bitcoin whitepaper started a revolution when it was published in 2008. Bringing together a variety of technologies, the unknown author or team proposed a new form of decentralized money that offered transparency, privacy, and elimination of third parties like banks. Thus, the first cryptocurrency was born. Fast forward to today and there’s a growing universe of digital currencies – all competing in one way or another to become the dominant form of digital cash.
While Bitcoin remains as the poster-child for cryptocurrencies, its rise to fame has brought forth a pivotal challenge – scalability. As the number of transactions increase, networks are finding it difficult to handle the high volume leading to slower transaction times and increased costs. Scalability, thus, emerges as the ubiquitous challenge that cryptocurrencies must surpass to fulfil their promise of being the “money of the future”.
Dealings with Demand
As cryptocurrencies endeavour to become mainstream, they confront an increase in demand which in turn exhibits the underlying issues of scalability. Bitcoin, for instance, can theoretically process only 7 transactions per second (tps), while its actual capacity has varied between 2-5 tps. In comparison, Visa processes an average of 1,700 tps, demonstrating the stark disparity between cryptocurrencies and traditional financial systems.
To achieve scalability, cryptocurrencies have been exploring two broad pathways – changing their baseline technologies or implementing new layers on top of the existing blockchain.
Off-chain & On-chain Scalability Solutions
On-chain scalability solutions involve changes to the network that increase its capacity. Bitcoin Cash, for example, increases the block size from Bitcoin’s 1MB to a striking 32MB, allowing more transactions per block. Other technologies, such as Sharding in Ethereum 2.0, break transactions into smaller, manageable pieces distributed among multiple nodes, reducing the load on any one system.
Off-chain solutions, on the other hand, endeavour to remove transactions from the blockchain altogether. Bitcoin’s proposed Lightning Network allows users to open private channels for transactions which are only registered on the blockchain when the channels close. The Segregated Witness (SegWit) technology in Litecoin reduces the amount of data per transaction, making the process more efficient.
Racing against rising demand, cryptocurrencies are also employing other novel technologies. IOTA, designed for the Internet of Things, uses a Directed Acyclic Graph structure which eradicates fees and allows for high scalability. Nano employs a block-lattice structure where each user has their own blockchain, reducing transaction times.
Future Directions
As crypto networks begin to incorporate these scalable solutions, it is essential to consider the trade-offs, specifically the “scalability trilemma” proposed by Ethereum co-founder, Vitalik Buterin. This philosophy suggests that a blockchain can only attain two of the following: decentralization, security, or scalability. As developers forge ahead, they must decide which aspects to prioritize.
While scalability might be the prevalent challenge, cryptocurrencies face others, including interoperability and regulatory issues. Despite these hurdles, the world of cryptocurrencies holds tremendous potential. As more businesses, governments, and individuals continue to adopt and accept cryptocurrencies, demand will only surge. It is then up to the ingenuity and innovativeness of developers to ensure that these digital currencies can meet this demand, and truly revolutionize our economy.
Sources:
1. Nakamoto, S. (2008). Bitcoin: A Peer-to-Peer Electronic Cash System.
2. Visa Inc. (2018). Visa Operational Performance Data.
3. Buterin, V. (2017). The Meaning of Decentralization. Medium.
4. Bitcoin Cash. (2018). Bitcoin Cash: Peer-to-Peer Electronic Cash.
5. Ethereum Foundation (2020). Ethereum 2.0 Introduction.
6. Lightning Network. (2020). Lightning Network Summary.
7. Litecoin Foundation. (2019). What is Litecoin?.
8. IOTA Foundation. (2020). What is IOTA?.
9. Nano. (2020). Nano: Digital Money for the Modern World.
