One of the most widely discussed issues in current cryptocurrency news is scalability, otherwise known as “being able to scale”. In financial markets, scalability can refer to a financial institution’s ability to expand along with increased market demand. This applies to cryptocurrencies because, as they become more appealing to the general public, they become more mainstream and are used more often than when they were first created. Since they have started to gain more users, all cryptocurrencies have not been able to increase in transactions per second enough to meet the convenience standards of Visa or Paypal.
Founder of the 1confirmation venture fund company, Nick Tomaino, summarized the shortest possible answer on the issue of cryptocurrency scalability in his Medium article, “On the Scalability of Blockchains”. He states that “what is difficult is creating a blockchain system that offers users the optimal combination of scalability, decentralization, and security.” This issue has been coined the scalability trilemma by Vitalik. According to this term’s definition, only two of the three combinations can exist at one time. For instance, a cryptocurrency can have decentralization and security, but not have scalability.
There are numerous tokens that sacrifice one of these aspects to maintain their growth as they become more popular. The touted Ripple (XRP) is an example of a cryptocurrency that sacrificed decentralization (by being centralized) to continue being able to scale while remaining secure. However, centralization isn’t the option that everyone within blockchain technology wants to lean on in regards to their personal philosophy on cryptocurrencies and the freedom they claim that these cryptocurrencies should allow each investor to have. One Blockgeek article summarizes the mindset of many by stating that
From the side that argues in favor of a decentralized cryptocurrency that is able to scale, the biggest issue is the lack of a community consensus on what procedure developers should take to improve scalability while maintaining the decentralized quality of many cryptocurrencies. Miners, developers, businesses, and other investors must agree on the proposals that come forward to expand block size of any of the cryptocurrencies. The process of reviewing options can require months for one of the contributing players to disagree on the proposal.
Bitcoin, for instance, is very well known for having a 1MB block size limit, and many in the Bitcoin community wanted the developers to become bold enough to increase the limit to 8MB or even 32MB. However, no proposal gained enough support to be enforced, so the newer, alternate form of Bitcoin, Bitcoin Cash (BCH) activated an upgrade to increase its block size to the sought after 32 MB in May of 2018. An explanation for Bitcoin Cash’s upgrade was posted on Reddit as “paving the way for future adoption as well as new functionality being added, such as op nodes.” Critics of this change pointed out that the change makes operating full nodes more expensive, possibly resulting in less decentralization on the network. It seems that we can't yet shake the trilemma.
So far, during September of 2018, the more well-known cryptocurrencies, such as Bitcoin and Ethereum, have been making strides in providing a balance between scalability, security, and decentralization. Several developers and supporters of the cryptocurrency community have detailed possible solutions to the issue of scalability.
One proposal that has been popping up in news headlines for the past year is the Lightning Network. The Lightning Network is a secondary layer that operates on top of the blockchain. In theory, this layer can process an unlimited number of transactions per second. Final balances don’t show up on the ledger until after the transaction has been completed, and the transactions only take place between the two parties involved in the purchase, without miners. One disadvantage of this network is the lack of security it has due to its disconnection from the blockchain.
So far, it is only used for micro-transactions that have no risk of bankruptcy, but some investors have risked testing Lightning transactions on the Bitcoin network. This is very much discouraged by the Lightning developers, who state that such transactions could put large funds at risk.
Another solution that has been recently created is Plasma Cash, a scaling solution that its developers believe is a much improved version of the existing solution, Plasma. Plasma improves low scalability by optimizing data that is passed onto the root Blockchain, thus reducing the transaction fees for smart contracts and decentralized applications. However, it requires users to download and authenticate each Plasma block. The developers behind Plasma Cash claim that users would only have to pay attention to the blocks that contain coins they wish to keep track of, eliminating the numerous coins that could slow down the transaction process.
An additional benefit to Plasma Cash is the lack of fraud that occurs within it. Since Plasma Cash has an owner, hacking cannot cause users to lose money because the coins aren’t fully fungible or interchangeable, so no one can take another user’s coin without the user being alerted to the act. This appeals to many within cryptocurrency communities who are aware of the scalability trilemma.
Other proposed solutions, such as SegWit and Sharding, are growing in popularity just as Plasma Cash and The Lightning Network have been in recent months.
The list of solutions continues to expand among online cryptocurrency communities and developers. One aspect of cryptocurrency developers that could provide optimism to the issue of scalability is the speed with which this list grows on a daily basis. So far, between 2017 and 2018, much innovation has taken place for the sake of maintaining the image of decentralized cryptocurrencies, and blockchain enthusiasts may see a great change to the scalability of these cryptocurrencies in the near future.