Unlocking Blockchain’s Achilles' Heel - Faster, Cheaper, Secure
Imagine a world where financial transactions happen instantly, voting systems are immune to fraud, and supply chains are transparent and efficient. This is the promise of blockchain technology, but there's one major hurdle: scalability.
The Scalability Challenge
Think of blockchain as a highway. When there are too many cars (transactions), things get slow and congested. That's what's happening to many blockchains today. They can't handle the high volume of transactions needed for widespread adoption.
Blockchain’s Achilles' Heel
The most secure and decentralized blockchains often struggle with scalability. For example, Bitcoin can only process about 7 transactions per second, while Visa can handle tens of thousands. This is the "scalability trilemma": you can only have two out of three - decentralization, security, and scalability.
Blockchain Solutions on the Horizon
Thankfully, innovative solutions are emerging to overcome the scalability challenge.
Here are three of the most promising:
- Layer 2 solutions: Imagine building additional lanes on top of the existing highway. Layer 2 solutions like Arbitrum and Optimism do just that, taking transactions off the main blockchain and processing them faster.
- Sharding: Think of dividing the highway into smaller sections. Sharding splits the blockchain into smaller segments called shards, each handling its own transactions. Ethereum 2.0 is implementing this to boost its scalability.
- Separate Chain Solutions: Sometimes, the best solution is to build a new highway altogether. Blockchains like Avalanche and NEAR are designed from the ground up with scalability in mind, using novel consensus mechanisms and network structures.
The most decentralized and secure blockchain networks struggle at times to process transactions per second (TPS), hindering their ability to gain widespread usage. The ones that have built scalable solutions are either not decentralized or secure (enough) to gain widespread trust.
Scalability in blockchain isn’t just about higher TPS; it’s about expanding a blockchain's speed and efficiency while maintaining its decentralization and security.
It is the biggest challenge in crypto and has prompted an entire subset of innovation and development in the industry.
In this article, you’ll explore the innovations taking place in the scalability sector, with a focus on networks at the forefront of the industry, such as Avalanche (AVAX) and NEAR Protocol (NEAR).
The Impact of Blockchain Scalability
Solving scalability isn't just about tech; it's about unlocking the true potential of blockchain. With faster and more efficient networks, we can revolutionize industries like finance, healthcare, and even voting.
Blockchain Real-World Applications
- Financial Services: Imagine instant cross-border payments or loans without paperwork. Scalable blockchains can make it happen.
- Internet of Things (IoT): Billions of connected devices will generate massive amounts of data. Scalable blockchains can securely store and manage this data.
- Decentralized Applications (dApps): From games and social media to marketplaces and prediction markets, dApps can thrive on faster and more affordable blockchains.
Challenges and Considerations
While exciting, these solutions come with their own challenges:
- Layer 2 complexity: Adding layers can make the system more complex, impacting user experience and adoption.
- Sharding and security: Each shard is a potential target for attacks, so security needs to be carefully considered.
- New chain development: Building new blockchains takes time and resources, and they need to establish their own user base and ecosystem.
Understanding the Scalability Trilemma
The scalability trilemma is the concept suggesting that a network can only achieve two of the following three attributes at best: decentralization, security, and scalability.
Decentralization prevents control by a single entity, security defends against attacks, and scalability ensures efficient handling of a large number of transactions.
Traditionally, enhancing scalability always comes at the cost of either decentralization or security.
For example, XRP, a highly scalable and secure blockchain network, significantly sacrifices its decentralization to achieve scalability.
This trade-off allows for faster transaction speeds and a more efficient network, which is crucial for XRP's role in the financial industry, particularly for cross-border payments.
For the purpose XRP achieves within the market, this trade-off is not such a big deal. However, it does demonstrate that scalability has always come at a cost.
No blockchain has ever definitely been able to solve the scalability trilemma, but there are some solutions coming close.
Pathways to Solving Scalability
Layer 2 Solutions
Layer 2 solutions are protocols developed on top of an existing decentralized blockchain to boost transaction speeds and efficiency.
They handle transactions off the main chain on a less secure, less decentralized, yet highly scalable network, and then send proofs of those transactions back to the main blockchain.
This allows Layer 2 networks to leverage the security and decentralization of the main blockchain without sacrificing scalability.
Sharding is a method where a blockchain is divided into smaller, manageable segments. This division allows for parallel transaction processing, significantly increasing the speed of the network.
Sharding is a main feature of the Ethereum 2.0 upgrade. It promises to greatly enhance the blockchain's scalability with only minor sacrifices in security.
Separate Chain Solutions
The most direct approach to solving scalability is the creation of new blockchains specifically designed to do so.
These new networks are built from the ground up with scalability in mind, employing innovative consensus mechanisms and optimized network structures.
This approach often results in blockchains that can process transactions more efficiently and at a higher throughput compared to older networks.
Two prime examples of such blockchains are Avalanche (AVAX) and the NEAR network (NEAR).
The Blockchains Solving Scalability
Avalanche stands out in the blockchain space for its unique approach to scalability. It employs an advanced consensus mechanism that strikes a balance between speed, security, and decentralization.
Instead of a single blockchain, Avalanche is a network of multiple independent yet interoperable blockchains. These blockchains are called Subnetworks, each one operating on different systems of rules, validators, and applications.
This mechanism allows for rapid transaction finalization, making AVAX an ideal platform for high-throughput decentralized applications.
The NEAR protocol addresses scalability through its sharding technology. This design enables efficient transaction processing and data storage, allowing the network to scale as the number of transactions increases.
This is made possible via Nightshade, NEAR’s unique consensus mechanism that divides the blockchain into smaller chains that are led by different validators.
With Nightshade, the NEAR Protocol is capable of supporting dApps with high scalability, low latency, and low transaction costs. This makes the NEAR Protocol highly developer-friendly, user-friendly, and interoperable. Anyone can easily create, deploy, and use decentralized solutions on the NEAR network.
The Impact of Scalability on Blockchain Adoption
Scalability is more than a technical challenge; it's a gateway to widespread blockchain adoption. Current mainstream systems like Visa process tens of thousands of transactions per second, a benchmark blockchain must meet to compete effectively.
These improvements are crucial for blockchain to handle financial transactions and complex applications like supply chain management, voting systems, and decentralized identities.
- Financial Services: Blockchain can revolutionize banking and payments, but only if it can handle the high volume of transactions typical of these industries.
- Internet of Things (IoT): For blockchain to be viable in IoT, it must process numerous small transactions generated by millions of devices efficiently.
- Decentralized Applications (DApps): Scalability ensures that dApps function smoothly, particularly those requiring real-time user interaction like games and social media.
Challenges and Considerations in Scalability Solutions
While current scalability solutions are promising, they still come with some challenges and trade-offs:
Layer 2 Complexity
Despite their benefits in scalability, Layer 2 solutions require careful integration to ensure they do not overly complicate the blockchain ecosystem and remain secure.
Implementing Layer 2 solutions introduces additional complexity to the blockchain architecture. This complexity can affect not only the user experience but also the overall adoption of the network.
Users and developers may face challenges navigating these added layers, potentially leading to decreased efficiency and increased costs.
Furthermore, Layer 2 solutions require bridges and token wrapping to transfer assets to and from the main chain. These systems currently use more centralized techniques, creating a point of failure in overall security.
Sharding and Security
While sharding is a promising solution for scalability, it introduces new security challenges.
Each shard in a sharded blockchain may be more vulnerable to specific attacks, as the overall network security is distributed across multiple smaller segments.
Ensuring the security of each shard is crucial, as a breach in one shard can potentially compromise the integrity of the entire network.
Separate Chain Development
Developing entirely new blockchains to solve scalability can be resource-intensive and requires significant innovation and testing.
These new networks must establish their security and reliability, often needing to build a user base and ecosystem from scratch, which can take a lot of work.
Emerging Trends in Blockchain Scalability
The world of blockchain scalability is constantly evolving. Here are some trends to watch:
- Interoperability protocols: Imagine seamlessly moving between different blockchains, like taking an exit from one highway to another. Interoperability will be crucial for a connected blockchain ecosystem.
- Artificial intelligence (AI) in blockchain: AI can help predict network congestion and optimize transaction flow, making blockchains even more efficient.
- Advanced consensus mechanisms: New consensus algorithms like Avalanche's Avalanche Consensus and NEAR's Nightshade are being developed to further improve scalability while maintaining security and decentralization.
The Future of Scalability
Blockchain scalability is not just a technical challenge; it's a key to unlocking the technology's full potential. As solutions continue to evolve, we can expect to see a future where blockchain is faster, more efficient, and accessible to everyone.
Invest in the Leading Scalability Solutions
Blockchain scalability is crucial for the technology's future success and broader adoption. As the blockchain ecosystem continues to grow and evolve, so will the solutions to scalability, shaping the future of this transformative technology.
Investors, developers, and users alike should keep a close eye on these developments. The ability to efficiently process a high volume of transactions is not just a technical milestone but a key to unlocking the full potential of blockchain technology across various sectors.
Through Bake’s Scalability Solvers Smart Bundle, you can optimize your exposure to the two leading Scalability Solutions on the market — AVAX and NEAR.
DISCLAIMER: Please note that the information on this blog and in any articles posted on this blog is for general information only and should not be relied upon as financial advice. Cake Pte. Ltd., Bake, UAB, and its affiliates (the “Cake Group”) are not licensed financial advisers. You may wish to approach your own independent financial advisor before making any decision to buy, sell or hold any product and/or digital assets mentioned in this blog.
Any views, opinions, references, assertions of fact and/or other statements are not necessarily the views held by the Cake Group. The Cake Group disclaims any liability whatsoever that may arise out of or in connection with such statements. Always do your own research before investing in any financial assets and consult a qualified financial advisor if necessary.