Though blockchain technology offers uncompromised advantages, it still has limitations, and in this article, I would like to explore one of them, i.e. scalability. Besides, I will also cover the Layer 2 solutions as a way to overcome this challenge.
Blockchains differentiate themselves from conventional digital databases in several key aspects. Firstly, they function as distributed databases, dispersing data across numerous servers located in diverse physical locations. This decentralisation enhances reliability, performance, and transparency compared to centralised databases.
Moreover, blockchains use open-source software and enable the entire network community to collaboratively examine the underlying code. This transparency improves the detection and resolution of bugs, glitches, or vulnerabilities.
Another important benefit of the technology is that, once validated, new information stays immutable on the blockchain; it cannot be altered. Security and trust are maintained through majority consensus among network participants, promoting a shared responsibility model rather than reliance on a single central entity. The problem arises when the transaction volume increases.
Scalability Challenge
Blockchain scalability refers to the challenge of accommodating increased transaction volumes without sacrificing speed or security. Two key factors affecting scalability are block time and transactions per second.
Block time represents the average duration for adding a new block to the blockchain, with shorter times potentially enabling faster transactions but also increasing the risk of forks and compromising security.
TPS indicates the number of transactions a blockchain can process per second, with traditional systems like Visa capable of handling thousands of transactions, whereas many blockchain networks, prioritising decentralisation and security, may have lower TPS rates.
Bitcoin, the leading blockchain, faces scalability issues due to its small 1MB block size, resulting in limited transactions and higher fees. Proposed solutions like Segregated Witness (SegWit) aim to address this, while Ethereum employs a 15-second block time, albeit with constraints on transactions per block.
Simply put, if we want to enhance blockchain performance and usability we need to resolve the scalability issue.
Layer 1 Solutions
On the base level of architecture, there are solutions to overcome scaling obstacles. Layer 1 blockchain scaling solutions include the following methods:
- Increased Block Size
Some cryptocurrencies like Bitcoin Cash have enhanced their block size to accommodate more transactions per block, thereby augmenting network capacity. - Updated Consensus Mechanism
Blockchains like Ethereum have transitioned from proof-of-work (PoW) to proof-of-stake (PoS), where validators are chosen to process transactions based on their staked cryptocurrency holdings rather than computational power. - Sharding
Similar to database partitioning, sharding divides a blockchain database into smaller segments, enabling simultaneous transaction processing and boosting the overall capacity of the network.
Layer 2 Solutions
While Layer 1 refers to the main blockchain network where transactions are directly processed and recorded, in Layer 2 we have off-chain solutions that enhance scalability and efficiency by processing transactions outside the main chain before final settlement.
Just like in Layer 1, there are also several types of Layer 2 blockchain scaling options, including:
- Rollups
Transactions are bundled together and processed off-chain before being brought onto the main chain as a single transaction, increasing processing efficiency. - Side Chains
Independent blockchain networks with their validators allow parallel transaction processing, this improves transaction throughput but requires trust in both the side chain and bridge network - State Channels
Transactions are recorded off-chain in bulk, and once completed, the state of the channel is set and recorded on the main blockchain network, as seen in Bitcoin’s Lightning Network setup.
Layer 2 Solutions for Ethereum
As an example of the Layer 2 solutions let us take a look at how Ethereum solves the problem of scaling. Layer 2 solutions vary in how they alleviate Ethereum’s transaction burden, with side chains and blockchain rollups being the most common.
Sidechains operate as independent blockchains connected to Ethereum via a two-way bridge, facilitating asset movement without direct transfer. Through a two-way peg mechanism, assets are locked on Ethereum, mirrored on the sidechain, used for transactions, and then returned to Ethereum once completed.
In contrast, blockchain rollups bundle multiple transactions into a single data package submitted to Ethereum for processing and confirmation. Optimistic rollups assume validity unless proven otherwise, while zk-rollups provide cryptographic proof of transaction validity.
Using an analogy of a boss and assistant, sidechains work with copies of Ethereum’s workload, completing tasks before returning the original assets. Meanwhile, rollups compress multiple transactions into a single file, reducing Ethereum’s processing load and resulting in lower gas fees for users.
In recent years several Ethereum Layer 2 solutions have appeared and I need to say they successfully address the platform’s scalability challenges. One of them is Polygon, an independent sidechain which offers faster and cheaper transactions, processing up to 1,000 transactions per second (TPS) with an average gas fee of $0.01.
Another one is Arbitrum, an optimistic rollup, that boosts transaction speeds and lowers costs by bundling transactions off-chain, achieving 40,000 TPS with an average transaction cost of two cents.
Base, incubated by Coinbase, aims to create a ‘super-chain’ by interconnecting blockchains developed on the OP Stack, surpassing $300 million in total value locked (TVL). ImmutableX specialises in zk-rollup scaling for NFTs and Web3 games, providing software tools for developers and boasting gas-free, carbon-neutral NFT minting and speeds of up to 9,000 TPS.
We cannot but mention Ronin, a sidechain by Sky Mavis, that ensures near-instant transactions at less than half a cent cost, catering specifically to the gaming industry.
Advantages of Layer 2
- High Throughput
Layer 2 solutions significantly enhance the network’s throughput by efficiently processing and bundling multiple transactions together, allowing for a smoother and more efficient blockchain experience. - Reduced Wait Time
Transactions are confirmed and processed more quickly due to the aggregation of transactions into batches, reducing user wait times.
Wrapping Up
Layer 2 blockchain solutions are definitely able to enhance transaction speed and reduce costs. However, they do encounter certain limitations too. These include the risk of fraud by validators, compromised decentralization for efficiency gains, and slow withdrawal processes with potential added costs, exemplified by plasma chains.
Besides, implementing Layer 2 solutions demands significant computational resources, rendering some options less viable for low-activity scenarios. Even so, ongoing development in Layer 2 solutions is a must for solving blockchain scalability issues and driving the future growth of the blockchain ecosystem.
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