Ram and Nisha are a worried couple. A thousand guests have arrived at their wedding reception. Unfortunately, they were only expecting 500 guests. The wedding planner is losing her cool. How can they possibly serve an additional 500 guests? That too at such short notice! Ram and Nisha need to scale up to fix the problem. Sometimes, when blockchain networks get congested, they, too, need some scalability to ensure smooth functioning. Let’s understand how they achieve the ability to handle things better by looking at 10 must-know blockchain scaling terms.
But first, let’s make sure we’re clear about the basics.
Understanding blockchain scaling
As more people start using blockchain networks, the amount of data stored on the network also increases. This leads to slower transaction times, higher fees, and reduced efficiency. Blockchain scaling is the solution to this problem.
What is blockchain scaling?
Blockchain scaling refers to the ability of a blockchain network to handle an increasing number of transactions or users. The key is that will it learns to do this, it must not compromise its security or decentralization.
Scaling solutions aim to increase the capacity of blockchain networks to process transactions. They allow for more users to participate in the network while maintaining fast transaction speeds and low fees.
Why is scaling important for blockchains?
Scaling is crucial for blockchain networks. Because without it, neither would mass adoption be possible nor would many use cases.
That said, implementing scaling solutions often requires trade-offs—between decentralization, security, and scalability.
Types of scaling solutions for blockchain
There are several ways to scale blockchain networks.
Off-chain solutions, such as payment channels and state channels, allow for transactions to occur off the main blockchain. They are settled outside first and on the blockchain later.
On-chain solutions, such as sharding and sidechains, present another way for blockchains to scale. These solutions usually involve the creation of separate chains to process transactions. In this way, they reduce the burden on the main blockchain.
Then there are protocol upgrades, such as the upcoming Shanghai one on the Ethereum network. Upgrades may increase the block size limit or change the consensus algorithm. Both of these options work. They can improve the network’s efficiency and scalability.
10 blockchain scaling terms
Blockchains employ a range of scaling techniques. They can be categorized into three main types: on-chain scaling, off-chain scaling, and Layer-2 scaling. While we have seen what the first two mean, let’s take a quick look at the third before progressing. Layer-2 scaling solutions involve creating a secondary layer on top of the main blockchain. Like other scaling solutions, this, too, helps process transactions more efficiently without compromising on security or decentralization.
These three categories encompass a wide range of scaling solutions. Each solution comes with its own advantages and disadvantages. And they are often implemented in combination with each other to achieve optimal results. To learn all about them, check out our list of 10 blockchain scaling terms below.
Sharding is a technique to increase the throughput of a blockchain network. It involves breaking the network into smaller pieces called shards. Each shard is responsible for processing a subset of the network’s transactions. In this way, sharding reduces the overall burden on the network and allows for faster transactions.
2. Off-chain transactions
Off-chain transactions are transactions that occur outside of the main blockchain network. Instead, they are settled on a separate off-chain network or payment channel. This approach can reduce transaction fees and increase transaction speeds, but it also introduces new security and privacy considerations.
Sidechains are separate blockchain networks. But they are connected to the main blockchain network. They help process transactions that are not suitable for the main network. And they encourage users to experiment with new features and upgrades without risking the security of the main network.
Segregated Witness (SegWit) is one of Bitcoin’s protocol upgrades. It separates transaction data from signature data, allowing for more transactions in each block. In this way, it improves the network’s efficiency and scalability while reducing transaction fees.
5. Layer-2 scaling solutions
Layer-2 scaling solutions are solutions that try to increase the capacity of a blockchain network without modifying the underlying protocol. Off-chain transactions, payment channels, and other approaches are all solutions of this type. They allow for faster and cheaper transactions while maintaining the security and decentralization of the main network.
Plasma is a Layer-2 scaling solution for Ethereum. It allows for the creation of secure and scalable sidechains that enable fast and low-cost transactions. Read more about them here.
7. State channels
State channels are a type of off-chain transaction. It allows for multiple transactions to be conducted without requiring each transaction to be processed on the main blockchain. Peers on the channel only have to submit two on-chain transactions. First, to open the channel and then close it. Meanwhile, the channel can conduct an arbitrary number of off-chain transactions.
This scaling solution allows for extremely high transaction throughput and results in lower costs for users.
This approach can significantly reduce transaction fees and increase transaction speeds.
8. Lightning Network
Lightning Network is a Layer-2 scaling solution for Bitcoin. It allows for instant and low-cost transactions through a network of payment channels. The network enables micropayments and facilitates transactions between users who do not have a direct payment channel.
Tangle is the distributed ledger technology of the IOTA crypto network. It uses a Directed Acyclic Graph (DAG) structure instead of a traditional blockchain to enable faster and more scalable transactions.
Hashgraph is a consensus algorithm that gives blockchain networks a directed acyclic graph (DAG) structure. It also makes transaction processing faster and more efficient. Hashgraph claims to have higher throughput and better security than traditional networks.
How these blockchain scaling terms are used in scaling solutions
Blockchain scaling solutions help increase the capacity of a blockchain network. They enable faster and more efficient transaction processing. Sharding, sidechains, off-chain transactions, and Layer-2 scaling solutions are all examples of these techniques. SegWit, Lightning Network, Tangle, and Hashgraph are all specific implementations of these scaling solutions in various blockchain networks.
To help put things in perspective, some of the terms we’ve been looking at are categories or types of scaling solutions, while others are the solutions of specific blockchains.
The differences between these terms
The scaling terminologies differ primarily in how they are used. Some fix the issue at the block level, while some create a separate structure. And still others move it to a whole other interconnected but separate blockchain—a layer.
On-chain scaling refers to a change in the way a block is sequenced, while off-chain solutions involve taking the processing of blocks out of the chain. The layer-2 scaling solution processes transactions on a secondary layer.
Pros and cons of each solution
Scaling solutions can also help address other challenges associated with blockchain technology, such as high transaction fees and slow transaction times. By reducing these barriers to entry, scaling can help to make blockchain technology more accessible to a wider range of users and applications.
While scaling is essential for the growth and adoption of blockchain technology, it also comes with some disadvantages. One major disadvantage is the potential for centralization. As scaling solutions require more computing power and resources, they may cause power to concentrate on a few large nodes or mining pools. Additionally, some scaling solutions can introduce new features, such as off-chain transactions or layer-two solutions, which may not be as secure. Finally, scaling solutions can also introduce new technical complexities and require significant development and testing. This can slow down adoption and increase the risk of bugs or vulnerabilities.
Implementations and real-world examples
Scaling in blockchain can have different implementations. Some may base the scaling solutions on some specific technology, while others may go for something very different.
Real-world examples of projects implementing these solutions
For example, in a Proof-of-Work (PoW) blockchain like Bitcoin, on-chain scaling involves increasing the block size limit. This allows more transactions to be included in each block. However, in a Proof-of-Stake (PoS) chain like Ethereum, on-chain scaling can involve sharding. Here, the blockchain is split into smaller partitions or shards, and each of them can process transactions parallelly. This increases the transaction throughput while maintaining security and decentralization.
Off-chain scaling solutions can also differ on the basis of the specific implementation. For example, in the Lightning Network, off-chain transactions are settled on a separate network of payment channels. This helps process transactions faster and with lower fees. In contrast, in state channels, off-chain transactions are settled directly between two parties without involving a separate network.
Layer-2 scaling solutions can also differ from one implementation to the next. For example, Optimism, a layer-2 solution for Ethereum, take transactions to a separate network and then rolls them up to commit them to Ethereum. In contrast, Polygon, which also runs on Ethereum and helps it scale, works very differently as it takes the PoS route.
The role of scaling solutions in the future of blockchain technology
Scaling is critical to the future of blockchain technology. It is what will enable blockchain networks to survive despite handling an increasing transaction volume. In doing this, scaling helps support broader adoption. As blockchains continue to grow and evolve, scaling will be essential to them reaching their full potential. To learn more blockchain scaling terms, check out our glossary.