As the use cases of blockchain technology have ballooned in recent times (with everything from NFTs to oracles), a significant problem has emerged with protocols such as Ethereum. The high demand for making transactions on the blockchain has led to the gas fees which are necessary to power them becoming increasingly expensive. At the same time, the algorithms that must be performed to add to the blockchain are proving wasteful and slow. In short, blockchains have a major throughput problem – one that could even scupper the arrival of Web3. So just what is being done about it?
The Blockchain Trilemma
Vitalik Buterin, co-founder of the Ethereum blockchain, has postulated a so-called “blockchain trilemma” that means developers have to make trade-offs between decentralization, scalability and security – without being able to deliver all three at the same time. In its current incarnation, Ethereum is arguably prioritizing the latter two.
The long-awaited Ethereum 2.0 is a response to these concerns but has been in gestation for so long (since 2014!) that even its name has been deprecated. The ideas behind the upgrade are to make Ethereum simultaneously more scalable (with an ambition of supporting thousands of transactions per second), secure, and sustainable – all while still remaining decentralized.
As it currently stands, Ethereum nodes (the computers powering the blockchain) struggle to handle the transactions per second required. It may surprise you to learn that Ethereum can only handle somewhere between 15-45 transactions per second – severely limiting what decentralized applications are capable of. To remedy that, Ethereum wants to increase the number of nodes rather than increasing the size of nodes (which would restrict access to only those with the most powerful and expensive computers).
Proof-of-Stake
Let’s take a closer look at the technology behind the Ethereum upgrades. One of its major innovations is moving the way it validates transactions from proof-of-work to proof-of-stake. The former involves miners solving complex mathematical problems in order to add new blocks onto the chain – which as we mentioned before is slow and expensive. Proof-of-stake instead sees users staking cryptocurrency to become validators. They are then randomly chosen to create new blocks as well as check and confirm blocks created by others.
You’ll remember that Buterin’s trilemma means that decentralization should suffer at the expense of security and scalability. But Ethereum is betting on the power of proof-of-stake to allow it to overcome that problem. That’s because proof-of-stake ensures that the barriers to entry are low. Users are able to stake the ETH token to become validators who process transactions and create new blocks on the chain – something far easier to get into versus the mining that currently secures the network.
Shard Chains and Rollups
Along with the proof-of-stake upgrades is another crucial feature for scalability: shard chains. The idea is to help Ethereum process more transactions and store data more efficiently by creating new chains known as shards.
Those shards are part of efforts to simultaneously preserve the golden goose of Web3 – decentralization. Stakers will be randomly assigned to validate the shard chains, which are planned to number 64 in total. The shard chains will only require validators to store and run data for the shard they are validating, rather than the whole network – making becoming a validator more accessible and less hardware-intensive.
The initial plan is to have the shard chains only provide data to the network, being incapable of handling transactions. The key to using them to boost throughput is via technology known as rollups. These allow transactions to be executed outside the main Ethereum chain, before being resubmitted alongside cryptographic proof – essentially taking computation off-chain while the data stays on.
All upgrades combined, Ethereum is targeting 100,000 transactions per second – an exponential increase on what it currently achieves. In terms of delivering these upgrades, however, Ethereum is taking a slow approach – opting to roll out improvements over time. The proof-of-stake element, in the form of the Beacon Chain, shipped in December 2020. Actually merging it with the main Ethereum Network is scheduled for 2022, while shard chains are targeted for release in 2023.
Outside of Ethereum
Despite its popularity, Ethereum is of course far from the only blockchain, and others are attempting to solve the problem of throughput and scalability in different ways. Sidechains are one prominent example, a practice whereby a blockchain is linked to another, allowing tokens to move between the two. Liquid Network, for instance, pairs with Bitcoin as the main chain. It works by enabling users to send coins to an output address on the main chain, at which point coins will show up in Liquid Network instead. After their business is done, assets can be moved back onto the main chain.
Solving the blockchain trilemma is continuing to prove a very difficult task – but only once it is achieved does the full potential of Web3 have any chance of being unlocked. What is clear is that no one approach will suffice – and even in combination, estimated speeds remain a tiny fraction of what we are used to in traditional computing.