Blockchain scalability is the rate at which a cryptocurrency network can process transactions. Technically, a blockchain is a time-linked distributed ledger. This means that each node in the network retains a copy of the ledger.
On the surface, this is a good idea because it reduces the risk of corruption by any individual or group within the network. However, requiring each node to retain a copy of the ledger dramatically reduces the throughput of the system. Essentially, the system can only work as fast as any single computer within the network. Each block within the blockchain is nothing more than a series of transactions. The transaction processing capacity is limited in terms of size and frequency.
On the Bitcoin network, the average block creation time is 10 minutes, and the block size is limited to 1 megabyte. Therefore, the average time to process a transaction on the network is three to seven seconds. These size and frequency limitations were never a problem until Bitcoin exploded in popularity beginning in 2017. Bitcoin entered a raging bull market during Q3 2017. Suddenly, it became abundantly clear that the blockchain network had a major scalability problem.
The transaction speed was simply too slow to service the number of users. The Bitcoin blockchain network managed to stumble its way through 2017 until the bull market dissipated in early-2018. Unfortunately, many first-time customers encountered a rather poor experience with Bitcoin and the entire blockchain network. The slow transaction speed forced many users to pay extremely high processing fees and it often took several hours for a transaction to be added to the blockchain network.
In July 2017, the Bitcoin community held a number of formal meetings and discussions on how to solve the scalability problem. These meetings consisted of developers, miners, and full node users. Two different perspectives emerged on how to solve the scalability problem. The first solution was to increase the block size limit. The second solution was to focus on exponential scaling off-chain by building additional protocols.
Ultimately, the Bitcoin community decided to solve its scalability problem by launching the Lightning Network. The Lightning Network is a payment protocol that operates on top of the Bitcoin blockchain known as a “layer 2” protocol. By adding another layer to the blockchain, it enables users to create payment channels between any two parties. These payment channels have no expiration date, thus allowing both parties to conduct multiple transactions without a time constraint.
The key ingredient of the Lightning Network is the fact that all transactions occur off-chain. In other words, the transactions occur outside of the main Bitcoin blockchain network. Of course, the transactions are eventually added to the main network.
Upon completion of all activity between the two parties on the Lightning Network, the information is transferred to the main network. However, in order to increase efficiency, all transactions between the two parties are recorded as a single transaction on the Bitcoin blockchain. The transaction speed on the Lightning Network is much faster in comparison to transactions that occur on the main network because Lightning users are not competing for space on the crowded Bitcoin blockchain. Additionally, fees are less expensive on the Lightning Network.
Despite the fact that the Lightning Network has reduced the blockchain scalability problem, several members of the Bitcoin community were never in favor of conducting transactions outside of the main network. Consequently, these members decided to create their own solution to Bitcoin’s scalability dilemma.
As we mentioned, the Bitcoin community held several meetings in July 2017 in an effort to solve the scalability problem. During these meetings, there was never a unanimous decision to adopt the Lightning Network. Instead, several developers and miners were in favor of increasing the block size limit as a way to increase the number of transactions on the Bitcoin blockchain. In order to reach a peaceful agreement between both parties, a hard fork was created, which provided two different solutions to the scalability dilemma.
In August 2017, Roger Ver launched Bitcoin Cash (BCH). Bitcoin Cash is the most famous hard fork occurrence within the Bitcoin blockchain ecosystem. During the past few years, Bitcoin Cash has been a solid performer within the crypto universe. Bitcoin Cash is always ranked among the top 10 in terms of daily volume and market capitalization.
Although BCH is a solid performer in the area of volume and market capitalization, the coin has never approached the trading volume level of Bitcoin. This is a clear indication that the crypto community has chosen to adopt the Lightning Network and other scalability solutions as the solution to Bitcoin’s scalability problem.
The Liquid Network
The Liquid Network is a Bitcoin sidechain designed to offer fast and confidential transactions between trading platforms. The project originated in 2015. The testnet version was released in May 2017, with version 1.0 launching in October 2018.
A sidechain is a secondary blockchain on which fictitious tokens are used to make currency transfers. Operations performed on the secondary blockchain are not recorded on the main blockchain. Consequently, the fees are substantially reduced, and the throughput is much higher because the nodes of the sidechain are private, capable of handling a large number of transactions.
The main advantages of the Liquid Network Sidechain are more transactions per second and shorter confirmation times. The end result is fast transfers at much lower prices. Additionally, the sidechain is able to maintain a level of decentralization because there is more than one entity managing the sidechain.
Nakamoto put little thought into the issue of scalability. Thankfully, the cryptocurrency universe has some of the most talented people working to improve Nakamoto’s original design of the blockchain network. This includes scalability. Even though the Lightning Network or the Liquid Network are not perfect, they are a step in the direction of increasing scalability.
Brief Summary of Blockchain Scalability
- Blockchain scalability is the rate at which the Bitcoin network can process transactions.
- The transaction processing capacity is limited in terms of size and frequency.
- The average block creation time within the Bitcoin network is 10 minutes with a block size of 1 megabyte.
- Two solutions emerged regarding the blockchain scalability problem.
- The first solution was to increase the block size limit.
- The second solution involved the creation of a new payment protocol.
- The new protocol would operate on top of the Bitcoin blockchain.
- It became known as the Lightning Network.
- All transactions within the Lightning Network occur off-chain.
- The Bitcoin community could not reach a consensus agreement concerning scalability.
- Roger Ver was in favor of increasing the block size limit and launched Bitcoin Cash (BCH).
- The Liquid Network is another scalability solution being worked on
- Going forward, users can choose BCH or BTC depending on their scalability views.