In creating blockchain technology, the developers counted on the privacy and anonymity of digital money. This 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.
Now cryptocurrencies, as a technology, face the next task — to achieve a high speed of operations, comparable to Visa and MasterCard. The problem of scalability remains one of the main obstacles to the mass implementation of blockchain technology. An increasing number of blockchain project teams are in search of solutions that could improve the performance of their network. Many claim that they have already solved or almost solved this problem, but such statements should be taken skeptically.
Ten years ago, Bitcoin was not popular with users. But then, over the years, the increase in the number of users in the system has created problems with the computing power of the technology. Using cryptocurrency has become more difficult due to long queues caused by the restrictions on the number of payments processed per second. Thus, the problem of scalability has worsened.
Developers began to actively look for optimal mechanisms for stabilizing work. Since then, coins have been regularly updated or separated in the absence of compromises. However, let’s go over the issues, one thing at a time.
Scalability Problem: The Essence of the Task
All Bitcoin transactions are made in blocks that receive transaction data. One block holds 1 MB of information, and the processing speed averages four payments per second. On the other hand, the processing power of miners is responsible for the movement of funds, and the stability of operations. This is necessary for calculating algorithms when creating coins and records of encrypted transactions. With each transaction, digital currency miners receive a commission.
Increasing the number of transactions also reduces the speed of each transaction. This allows the blockchain not tocope 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 has an impact on the liquidity (price spikes) of the coin — it is easier for a buyer to use cash or a bank card even to the detriment of anonymity and privacy.
Users in such cases lose interest and confidence in the currency, followed by miners. As a result, investors see the risk of investments and bring assets down from the peak value and popularity, and traders play on price movements.
How the Scalability Problem is Expressed
With the popularization of Bitcoin, the problem of the scalability of cryptocurrency was manifested due to network congestion. Therefore, it became more difficult to use the coin — in May 2017, the queues of transactions reached up to five days. So the question of the balance of speed and security of transactions arose.
You can analyze the problem using a practical example. Suppose it is necessary to transport 500 tons of cargo on a train with cars with the capacity of one ton with a preliminary safety check and loading with a loading time of 2 hours per unit. However, the cost of transportation services affects the position of the goods in descending order. As a result, it takes at least two weeks for the recipients with the lowest payment for delivery to receive the final product. Same with Bitcoin — it is impossible to make payments as quickly as from a bank card.
Based on what is written, you can distinguish the definition of the scalability problem — limiting the number of processed transactions in a certain time. However, the ability to select a paid commission may raise the priority of the operation in the blockchain queue but does not solve the problem.
The first thing that comes to mind is to increase the size of the block and the number of payments processed without additional measures. Unfortunately, the approach will reduce security, since dosed processing of information avoids the high risk of DDoS attacks (Intentional network congestion for fraudulent purposes). The size is provided for careful data verification. Nevertheless, it is necessary to analyze in detail possible solutions for the situation.
How to Solve Scalability
Developers, activists, and scientists have begun to look for ways to solve Bitcoin's scalability problem. The peak and indicative was the described situation in 2017 with long lines. It was then that the task was widely discussed in the crypto community. Three concepts for correcting this blockchain deficiency were highlighted:
- increase the block size, thereby reducing the fee for payments and increasing the rate of transaction processing per second (TPS). There are two drawbacks — the path leads to the centralization of the coin and the risk of successful attempts at DDoS attacks;
- segmented information processing or sharding. Some information is displayed outside the cells. In this way, the blockchain is divided into two or more segments responsible for different groups of transactions. There is also a risk of hacker attacks since less miner capacity is required to process shards. Due to the separation into several parts, safety checks require light algorithms. Thus, fraudsters can add false transactions to the network, an example is the 51 ％ attack;
- a group of L2 solutions to the scalability problem. The approach is a framework, a program that works on top of the blockchain, which offloads an existing network. Such concepts differ from on-chain (decisions within the coin system) by the intervention of an intermediary.
The first method requires dividing the net and creating a new coin. So there is a loss of backward compatibility support to the original. That is, currencies in such a case no longer have homogeneity. In a cryptographic environment, the phenomenon is called hardfork. Bitcoin Cash followed this path. As a result of the split, in August 2017 there was a separation from the first cryptocurrency with an increase in block size to 8 MB.
The second solution involves the creation of separate subnets of the block with the movement of part of the information beyond its limits. In this case, a softfork occurs — a change in the software protocol without dividing the coin. Similar to the release of a patch for a computer game with add-ons. An example is the Segregated Witness update. The block size increased to 2 MB with some information stored outside the main transaction chain.
The solution has drawbacks — each shard will be exposed to the danger of a cyber attack. For each such segment, less power is used than per unit.
Second Level Solutions
The architecture of early blockchains, primarily Bitcoin and Ethereum, was not designed for a large number of transactions and users, and therefore they have low bandwidth. For example, in Bitcoin it is 5-7 transactions per second (TPS), in Ethereum, it is about 15 TPS.
Scalability can be increased by changing the code of the blockchain protocol using functions such as sharding. But it takes a lot of time and can take years. In addition, such improvements change the foundations of architecture, so the project community does not always agree to carry them out.
L2 solutions allow at least partially solving the problem of low bandwidth and high fees for transfers without affecting the code of the main blockchain. Their main advantage is the ability to transfer assets between the addresses of the "first-level" while using the "second level", which can be either a separate off-chain protocol or a separate blockchain.
What Layer 2 Solutions Exist for Bitcoin?
The main L2 project for the first cryptocurrency is the Lightning Network (LN). It works on a protocol using smart contracts and so-called status channels. The Lightning Network was launched back in 2015, and since then it has been actively developing. By the end of May 2022, the total capacity of LN channels reached 3,900 BTC.
The main function of LN is the ability for bitcoin holders to make direct exchanges without writing information to its registry. To do this, you need to open a special channel using a single on-chain transaction and put bitcoins into it.
After activation, the payment channel allows you to make transfers off-chain, that is, outside the main network, with much higher speed and lower fees. Unlike on-chain transactions, transactions in Lightning Network channels are visible only to their users. Only the initial and final states of transactions are recorded in the main blockchain.
This approach significantly reduces the load on the main bitcoin network: the Lightning Network is capable of processing thousands of operations per second while ensuring a high level of system security.
What Layer 2 Solutions Exist for Ethereum?
Despite its low speed, Ethereum ecosystem is the most highly demanded for decentralized applications. Many popular projects in the fields of decentralized finance (DeFi) and non-interchangeable tokens (NFT) work on it. Therefore, the scalability problem is particularly acute for Ethereum.
Now several major L2 solutions are being developed in parallel at once:
The main technology for their work is Rollups, which has two main varieties:
- Optimistic Rollups. With this solution, transactions are made in the L2 network, and then in large groups are combined into a compact block, which is included by validators in the main Ethereum network. Optimistic Rollups are used in Arbitrum and Optimism.
- ZK-Rollups. Transactions in the second-level network are also combined into packets and sent to the Ethereum network, but their confirmation takes place with the help of special verifiers, which are cryptographic proof of the validity of operations. Polygon is implemented on the basis of ZK-Rollups. This technology for scaling Ethereum is considered by the main co-founder of the platform Vitalik Buterin.
Whatever the L2 solution, Ethereum as the "first layer" takes over the function of verifying transactions and producing blocks, the registry where the final states are recorded, and the consensus mechanism. Thus, the project does not need to create its own infrastructure.
There are other Layer 2 projects. For example, in July 2022, the startup Matter Labs announced the launch of zkSync 2.0. A month later, its own protocol, written in the Cairo language, launched the StarkWare project.
It is easy to note that in the Bitcoin protocol, network resources are used inefficiently. Each node processes and transmits data about a new block only a small fraction of the time. Network bandwidth is used in full for only a few seconds. The rest of the time, this node sends unconfirmed transactions and supporting data. This observation inspired researchers to find more efficient protocol schemes that could significantly improve system throughput without compromising network security and decentralization.
Now the crypto community has not come to a single solution. Disputes still arise, new coins are created, and protocol updates are issued. Effective solutions have already been developed, but there is still a risk of a human factor. The issue will be closed by the development of artificial intelligence as an intermediary of transactions.