Topic: Blockchain and The Importance of Scalability (Read 216 times)

As blockchain assets have breached the milestone of $150 billion in total market capitalisation, some blockchain platforms have begun to reach their capacity limits. We can observe fee markets for blockchain space emerge on the most popular platforms. However, it can be argued that $150B is still far from a significant scale in the world economy. With an ever-accelerating adoption, it outlines an urgent need to focus on blockchain scalability. How are the major players of the space trying to solve this issue?

The fee markets that are developing aren't inherently bad; they will be an important driver behind the adoption of the most efficient solutions. As the fees grow, the economic incentives push users to platforms with superior technology.
The Bitcoin community has been pondering a few options to provide temporary relief for current network congestion. Amongst the proposed approaches, segregated witness would use different accounting for various types of data in the blocks. This would lead to a modest short term block capacity increase.

Long term, some other features of the segregated witness upgrade would allow the lightning network to be deployed, which offers a viable scaling path. Another group advocates for a simple blocksize increase, determined in different ways: predetermined growth, self-adjusting blocksize or emergent consensus.

Unfortunately, an agreement has not been reached and the miners are struggling to come to a consensus on which solution to implement. This has lead to more and more users spilling over to alternative blockchain implementations, such as Ethereum.
Ethereum transactions are accounted for differently than through pure size. Users pay for the execution of smart contracts on the platform. Each block has a maximum number of execution units. Empirically, this seems to lead to a current transaction capacity that is roughly twice that of Bitcoin, as demonstrated by the peak volumes and the network backlog of recent high traffic events.

On a longer time scale, the Ethereum team attempts to tackle scalability by transitioning to verification of blocks by proof of stake. This can be applied to enable sharding of the blockchain over several network segments. While there is a lot of theoretical work behind the plan, the approach is still experimental and it remains to be seen how well it will operate in practice.

Finally, some other projects make a compromise by trading off decentralization for an increase in scalability. The network is composed of different classes of nodes, which have different privileges. This multi-tier system decreases resource requirements at the cost of introducing some centralization. While theoretically easier to challenge, the solution works well in practice on a number of platforms.
A major problem for most scaling solutions is the resource requirement for each transaction. As long as this is the case, the resource usage will grow linearly with the number of transactions. Some approaches of reducing the resource footprint of each transaction are promising as short term solutions, but as the platforms keep growing, they are bound to hit their limit at some point.

The Alvalor team believes that blockchain technology will fundamentally change how our society operates. We will need a platform that can not only scale to a global level in the sense that it is available everywhere. We need a system that can be used by every human being on this planet: a blockchain platform for the whole human race, at the scale of humanity itself.

The most promising concept to achieve this vision appears to be state channel technology, as implemented by the Bitcoin Lightning Network and the Ethereum Raiden Network. Instead of consuming resources for every transaction, the transaction will only consume resources when there is malicious intent from one of the parties. The blockchain will work as a final arbiter only when needed, enforcing trust conditionally.
Major challenges still remain. Bitcoin’s unsigned transaction output model makes it infeasible to design a state channel system that allows depositing funds into or withdrawing funds from a channel after it has been opened. It also doesn't offer support for multi-party channels, which hold tremendous potential. Lastly, channels are limited to one transaction at a time, which could easily stall lightning network routing and lead to the dangerous failure mode.

These limitations illustrate a core conflict we can observe in the blockchain sector. A valuable platform will rise in market capitalisation until it reaches a point of stagnating innovation. It is difficult to experiment on projects which are valued at several billion dollars. It becomes hard to change the fundamental building blocks and to leave behind the weight of a legacy blockchain. These market dynamics make it unlikely that any platform will remain at the forefront of progress until a peak of innovation has been reached.

At Alvalor, we believe that blockchain technology will mature on additional layers, beyond the basic technology. The first layer of blockchain technology has been explored extensively, without conclusively solving the scalability issue. Our team tries to fundamentally rethink the approach by moving complexity up to second and third layer solutions that are clever and simple in their design, just as Satoshi’s original blockchain architecture.

Alex.