April 3, 2018
Blockchain technology is poised for another breakout year, so much so that even its staunchest critics are backtracking on previously stated negative comments. However, one key challenge still remains — solving the blockchain scalability problem. Many solutions have been proposed, yet none have come to fruition.
As the number of blockchain transactions increases, blockchains are growing rapidly in size, resulting in slow transaction times. This is because the number of transactions a blockchain can digest never exceeds that of any of the network’s nodes. Blockchain becomes weaker as nodes are added to it, because inter-node latency logarithmically increases as each new node is added. Thus blockchains are unable to scale to process more transactions. Though cryptocurrencies continue to garner headlines, their lack of ability to compete with mainstream competitors like Visa in terms of transactions per second only becomes more apparent.
Since each block has a gas limit, the miners can only add transactions whose gas requirements add up to something which is equal to or less than the gas limit of the block (1).
Currently, all blockchain are structured as a peer-to-peer network. The participants, aka the nodes, are not given any extra special privileges. The idea is to create an egalitarian network. There is no central authority and nor is there any hierarchy. It is a flat topology.
All decentralized blockchain are structured like this because of a simple reason, to stay true to their philosophy. The idea is to have a currency system, where everyone is treated as an equal and there is no governing body, which can determine the value of the currency based on a whim.
The problem is, that unlike other pieces of technology, the more the number of nodes increases in a cryptocurrency network, the slower the whole process becomes. Consensus happens in a linear manner, meaning, suppose there are 3 nodes A, B and C.
For consensus to occur, first A would do the calculations and verify and then B will do the same and then C.
However, if there is a new node in the system called “D”, that would add one more node to the consensus system, which will increase the overall time period. As cryptocurrencies has become more popular, the transaction times have gotten slower. (2)
Blockstream’s Dr Peter Wiulle envisioned Segwit as one of the features of the sidechain which will run parallel to the main blockchain. The signature data will move on from the main chain to the extended block in the parallel chain: What this will do is that it’ll free up a lot of space in the block itself for more transactions.
It was envisioned that the signature data would be arranged in the form of a Merkle tree in the side chain. The Merkle root of the transactions was placed in the block along with the coinbase transaction (the first transaction in each block which basically signifies the block reward). However, on doing this, the developers stumbled upon something unexpected. They discovered that by putting the merkle root in that particular place they somehow increased the overall block size limit WITHOUT increasing the block size limit!
Now, since the main problem of blockchain has been the limited blocksize, why don’t we just increase them? Blockchain wasn’t supposed to have a 1 MB limit but then Satoshi was forced to put it because they didn’t want blockchain to be bogged down by spam transactions.
While this might sound like a good idea in practice, the implementation of this has been encountered with lots of challenges. In fact, this has given birth to a lot of debate in the Blockchain community with sides passionately arguing both for and against the block size increase.
Anyway, on May 21 2017, the New York Agreement took place where it was decided that Segwit will be activated and the block sizes will increase to 2 mb.
A state channel is a two-way communication channel between participants which enable them to conduct interactions, which would normally occur on the blockchain, off the blockchain. What this will do is that it will decrease transaction time exponentially since you are no longer dependent on a third party like a miner to valid your transaction.
The lightning network is an off-chain micropayment system which is designed to make transactions work faster in the blockchain. It was conceptualized by Joseph Poon and Tadge Dryja in their white paper which aimed to solve the block size limit and the transaction delay issues. It operates on top of Bitcoin and is often referred to as “Layer 2”. As Jimmy Song notes in his medium article: (3)
“The Lightning Network works by creating a double-signed transaction. That is, we have a new check that requires both parties to sign for it to be valid. The check specifies how much is being sent from one party to another. As new micro-payments are made from one party to the other, the amount on the check is changed and both parties sign the result.”
The network will enable Alice and Bob to transact with each other without the being held captive by a third part aka the miner. In order to activate this, the transaction needs to be signed off by both Alice and Bob before it is broadcasted into the network. This double signing is critical in order for the transaction to go through.
Blockchain are becoming more and more mainstream. In order to keep pace with the increased usage, the emerging technology itself should step up to rigorously address blockchain scalability challenge.
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