Learn Cryptocurrency
7 Feb 2022

What is Blockchain Scalability? Why Will It Be a Key Investment Metric in 2022?

Ananda Banerjee

Last Wednesday, while I was sitting in a quaint uptown eatery, I realized something important. The eatery kept serving two to four customers with relative ease, but everything slowed down by 10 pm when there were over 10 diners flocking the space. And the reasons were obvious. Fewer hands, fewer servers, and fewer resources. In short, lack of SCALABILITY.

Scalability in relation to a blockchain signifies its ability to accommodate additional resources or to scale up as and when the user base starts outgrowing the existing space. 

Key Takeaways

  • Blockchain Scalability is about improving the data and transaction management capabilities of the ecosystem concerned.
  • Scaling a blockchain is mostly about increasing the TPS (Transaction Per Second) limit.
  • You can scale a blockchain by using Layer-1, Layer-2, Consensus Algorithm Solutions, and Distributed Ledger Technology.
  • You can choose any two between Blockchain Decentralization, Security, and Scalability.
  • Going beyond, investors will keep a close eye on scalable crypto projects.

Lack of scalability isn’t just a blockchain problem. In fact, every setup that relies on progressive expansion needs to keep an eye on unscalable blockers. It’s just that a blockchain, being a distributed and decentralized ledger created to facilitate seamless transactions, needs to focus on scalability more than any other new technology.

But why are we even discussing Blockchain Scalability in 2022, when blockchains have been around for over a decade now? Well, it’s certainly not the eatery issue that I just discussed. Instead, scalability is hot on the heels of blockchains in 2022 as crypto projects like Polygon and Solana are aggressively betting on it. And with Ethereum 2.0 around the corner, talk about scalability is increasingly looking obligatory.

In the subsequent sections, we shall understand Blockchain Scalability in detail, including its importance, issues hindering large-scale adoption, and the scalability solutions all around us.

What is Blockchain Scalability?

Before we discuss the concept of Blockchain Scalability, it is appropriate to have a quick rundown of what a blockchain is. For starters, a blockchain is a digital platform or an ecosystem that lets participants interact in the absence of a central authority. A blockchain, as a thriving space, is transparent, auditable, and completely visible.

Initially ideated to speed up decentralized or rather authority-independent transactions, blockchains are powered by select consensus mechanisms or even Smart Contracts. The driving factor, in turn, depends on the ingrained features and utilities.

Like any other digital setup, a blockchain is made of the participants. Somewhat similar to the eatery that depends on its customers to survive. However, it is obvious that every blockchain eventually experiences speed-related issues when the number of participants grows, and so does the workload. And that is when decentralized ecosystems rely on scalability to get them out of the rut.

Scalability, in the context of blockchains, refers to its ability to bring more resources into the mix. And that too for improving throughput, reducing latency, and obviously lowering the transaction fees.

If you are looking at a more specific answer, blockchains high on scalability have greater TPS (Transactions Per Second) limits.

The Importance of Blockchain Scalability

Blockchains are the future. And if they start acting up with only a few million around, how can we expect them to handle billions of participants and transactions? Well, that is exactly why scalability matters.

Scalability, or the ability of a blockchain to grow in terms of resources and capabilities, aims at improving its adoption. Also, while some of the newest blockchains are showing up with scalability entrenched deep within, the more popular ones like Bitcoin and Ethereum are embracing it over time to keep their credibility and authority intact.

But that’s just projection. Scalability, in regard to blockchains, is a lot more quantifiable and takes the following factors into account:

  • Networking

A scalable blockchain can spread out infinitely. And as a decentralized setup depends on broadcasting the transaction details across nodes and miners, scalability helps minimize propagation delays. This feature speeds up data transmission and minimizes queuing.

(Fact Check: Queuing is a term used to refer to when network participants have to wait to get their transactions approved and through.)

  • Cost and capacity

There is a certain cost to maintaining a blockchain, especially the nodes that lend computational power to verify transactions. Also, not every node or computer that manages transactions is stacked with unimaginable resources. Scalability takes care of this by incrementally adding new nodes to the ecosystem, which increases the data handling capacity.

And it goes without saying that with more resources available, the higher cost per transaction also gets a reprieve.

  • Throughput

With networking potential and capacity getting a boost, blockchain throughput, in the case of scalable systems, also goes down. But that’s somewhat counterintuitive, as lower throughput means quickly forming larger blocks, which eventually pushes for additional resources and scalability.

Now, if you closely analyze these factors, you will know that scalability isn’t a one-way street. A blockchain’s need to be scalable is progressive and doesn’t end with a few increments.

Blockchain Scalability FAQs

What is a Blockchain Scaling Trilemma?

By now, you might have realized that improving transaction throughput, lowering fees, and speeding up transactions, in general, requires the ecosystem to be scalable. But there is a catch. Blockchain functionality is a trifecta of Decentralization, Scalability, and Security. And the interesting part is that only two aspects can be improved upon simultaneously. In most cases, the blockchain has to compromise on one of these three aspects.

For instance, if you plan on scaling a blockchain using massive computational resources, you are, in a way, cutting corners in terms of decentralization. Scaling the network involves deploying a lot of permissioned computers, and a large amount can sabotage the independent state of the blockchain.

Similarly, if you use clandestine computing resources and data storage units to scale the network to keep the decentralization quotient, the security takes a beating. And if you plan on keeping decentralization and security intact, especially to keep majority attacks at bay, you might have to let go of scalability.

But then, getting the best of both worlds does come at a cost.

What are the Best Scalability Solutions?

Lack of scalability is surely the biggest blocker when it comes to mainstream blockchain acceptance. Also, not every ecosystem can be scaled using the same set of resources. That is why we will now touch upon the best scalability solutions in play that can help scale almost any network with ease:

  • Layer-1 scaling solutions

Adding scalability to the core software layer of a blockchain is termed a First Layer or Layer-1 scaling solution. Some of the most significant Layer-1 or On-Chain scaling techniques include lowering the verification time of blocks and increasing the block size to speed up transactions.

If you are into specifics, some of the more prominent Layer-1 scaling solutions include SegWit, Hard Fork, and Sharding.

  • Layer-2 scaling solutions

On-chain scaling is reliable and relevant but not always possible, as the inherent protocol might not be accommodative towards the same. At this point, the blockchain needs to look up to off-chain scaling solutions for tackling network congestion and space constraints.

As far as the exact nomenclature is concerned, these solutions can be termed Plasma scaling, Sidechains, Lighting networks, and State Channels.

  • Scalable consensus

Although on and off-chain scaling solutions are impactful enough, they are purely implementational and not always effective. This is where a scalable consensus comes into play as it is literally etched into the blockchain schematics. Some of the more popular and scalable consensus solutions include BFT (Byzantine Fault Tolerance), POA (Proof-of-Authority), and DPoS or Delegated Proof-of-Stake.

  • Distributed ledgers

Last but not least, Distributed Blockchain Ledgers can also be used to scale specific blockchains in limited capacities. DLT or Distributed Ledger Technology targets the block accommodation to speed up transactions and improve throughput.

Note: If some of these terminologies sound unfamiliar, fret not, as we shall cover the same in a separate article on Scaling Solutions. Do look out for it if you are interested.

What Blockchain Scaling Means for the Investors

Blockchain technology is still in its infancy. And while organizations and governments are steadily adopting it across diverse verticals, most of us consider it analogous to cryptocurrencies. And this is what makes Blockchain scalability an important investment metric.

Major crypto projects that are steadily coming up the ranks are evaluated depending on the transaction speeds, interoperability, transaction speeds or TPS, and other factors relevant to speed and throughput. Therefore, in 2022 and even beyond, investors will continue to be biased towards crypto assets and tokens that are progressively scalable.

And while that might mean compromising decentralization or security, the trade-off seems more than acceptable given the use-case of the project. But that’s a headache for another day.

Wrapping Up

Even today, Blockchain Scalability continues to be a cause for concern as the perfect solution continues to elude us. And the ever-increasing reliance on the decentralized outlook isn’t making things easier for the new players on the crypto scene.

Skilled developers, evolutionary concepts like DAGs (Directed Acrylic Graphs), and other inclusions are being used to make blockchains more scalable over time, but each strategy isn’t without its share of pitfalls. Regardless, scalability, as a discussion, is far from over, and we shall keep encountering newer solutions and relevant crypto projects in the foreseeable future.

Looks like a concept worthy of a read! Well, at CoinSwitch, you can read and learn more about highly insightful topics like these.

Disclaimer : Crypto products and NFTs are unregulated and can be highly risky. There may be no regulatory recourse for any loss from such transactions. The information provided in this post is not to be considered as investment/financial advice from CoinSwitch. Any action taken upon the information shall be at user's own risk.

writer

Ananda Banerjee

Content Writer

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