April 18, 2023

Blockchain Scalability

By
Justin Strubel
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Unlocking the door to mass adoption

April 2023

The Blockchain Trilemma

Laws and constraints have always governed modern science and technology, with the builders spending countless hours either working within those walls or figuring out how to tear them down. Blockchain technology is no different and one of the most notable constraints that exists is the Blockchain Trilemma.New technology often leads to more efficient business models, and blockchain technology is no exception. Specifically, blockchain technology has unleashed a suite of tools for developers, creators, investors, and operators to build the next transformative business of our future.Examples of new concepts derived from digital assets:

Blockchain Trilemma

The Blockchain Trilemma says that there are three properties that a blockchain should ideally have, and according to Vitalik Buterin (co-founder of Ethereum), “If you stick to ‘simple’ techniques, you can at most get two of those but not all three.” The three properties are:

  • Scalability: the chain can process more transactions than a single regular node (think: a consumer laptop) can verify.
  • Decentralization: the chain can run without any trust dependencies on a small group of large centralized actors.
  • Security: the chain can resist a large percentage of participating nodes trying to attack it (higher number of nodes, and more distribution of nodes and participants reduce the risk of a coordinated attack on the network).

Blockchain technology has primarily existed within these trilemma walls, with various chains attempting to optimize within the triangle to provide the best user experience. However, achieving the high throughput of transactions processed cheaply, similar to the financial payment rails that we conduct commerce on today, has been tough. Furthermore, designing the networks to ensure sufficient security and decentralization while also achieving scalability has proven to be quite challenging.

Modularity and Cryptographic Proof Breakthroughs

There have been some incredible breakthroughs over the past few years in terms of blockchain design. In our view, one of the most important is the concept of modular design - the separation of tasks that need to be performed by different chains or layers of the stack in order to achieve a particular goal. While certain chains have been able to achieve both decentralization and security, scalability has been elusive because of the trilemma constraints, leading some to even question the future potential of blockchain tech. Although blockchains could achieve scalability through tradeoffs along the trilemma, there is now a way to make design changes that allow for stacking blockchains, delineating focus to particular functions (e.g. separating execution and data availability). With this, the blockchain trilemma constraint is diminished, and the goal of scaling a decentralized and secure blockchain ecosystem is now more realistic than before.

Additionally, breakthroughs in cryptographic proofs now allow for these “stacked” chains to communicate with each other in a secure way. The resulting upside is that a chain can process transactions at the same cost and speed as systems we’re more accustomed to today (like Visa and MasterCard), perhaps even better than they can.

This is all being done while maintaining the tremendous benefits of a blockchain enabled world:

  • A transparent way of processing transactions on a global scale
  • Cost savings for businesses employing blockchain infrastructure, due to a reduction in infrastructure and middlemen
  • Increased resistance to censorship, allowing more people across the globe, like the unbanked population, to have access to financial opportunity and technology that were unavailable in the traditional world

Scalability opens up a new array of opportunities and use cases that were not available before, and finally opens the pathway to new infrastructure that some of the world’s existing businesses can be reshaped on.

Ethereum’s Scaling Vision

Developers and blockchain architects are taking various approaches to tackle the blockchain trilemma, and Ethereum’s approach has been to focus on security and decentralization first, then design ways to improve scalability over time as the demand for blockspace increases. To understand what scaling is, we can dive a bit deeper into the “modular” design we mentioned before.

Ethereum has a main chain (“mainnet”) that is secured by Proof of Stake consensus, and transaction fees, aka “gas fees” are denominated in ETH, Ethereum’s native token. Therefore, during times of volatility and high usage, demand for Ethereum’s block space increases, and the protocol adjusts for this increased demand by increasing transaction costs. Ethereum’s design choices result in its mainnet having a capacity of roughly 15 transactions per second. This is orders of magnitude too low to handle any sort of real-world use cases like payments, which require a minimum of tens of thousands of transactions per second.

Different blockchains have tried many different ways to tackle the scalability problem, and even Ethereum has tried a few different methods to achieve scalability. The main method that has seen significant progress over the past couple years is the concept of a “Layer 2”. This entails creating another blockchain that operates similar to Ethereum, however it batches transactions together by executing the transactions “off-chain”, then verifies the transaction integrity using cryptographic proofs. This allows users to save on transaction fees, as the Ethereum mainnet transaction fee for consuming block space is split among many bundled transactions from the Layer 2 chain. There are different types of layer 2 chains that utilize different types of proofs, with varying ceilings for transaction throughput, but this is a topic for future discussion as the technology matures.

Ethereum endgame graphic
blue sky

Blue Sky Future

There is a fairly wide spectrum of thought around blockchain technology, from believers having devout faith in the technology and calling it revolutionary, non-believers dismissing it as useless, and individuals who are still trying to understand what to make of this new innovation.

What is clear to us now is we have entered a new phase in the evolution of the technology, where the development of Layer 2 blockchains has opened a new pathway for builders to explore. We believe this is a critical moment in blockchain development and we are excited to see the innovation unfold.

So what might the future look like? Below are just a few possibilities we’re excited about:

  • The redesign of existing digital native models (e.g. data storage, social media) to have better incentives and true digital ownership, and to be more accessible to all
  • The improvement of traditional businesses and utility, like remittances, lending and borrowing, payments, and financial derivatives to enable more efficiency, access, and transparency over their existing counterparts
  • The creation of entirely new business models, because we simply have new and better tools to create them. With every new technological advancement comes new applications and better ways to leverage the advancement. When geolocation came to mobile devices, it took time for people to realize that it wasn’t only possible to better navigate your way to something, you could also optimize how things came to you (for example, ride sharing apps and food delivery).

As Ethereum and other blockchains achieve scale and increasingly interoperate, countless new applications will surface, many of which we cannot yet imagine with the current state of the technology. We are at an exciting place, blockchain technology is enabling real-world applications, but with some temporary technical limitations usually around scalability. But it seems likely that these limitations will be lifted in the next few years as the space continues to innovate.

With the achievement of scale for blockchains in the rear-view mirror, we will finally be able to understand the power of decentralized, secure, and trustless ecosystems where ownership and power are in the hands of the users. We predict that this will have far-reaching implications for global commerce and is likely to be a net positive to society as a whole.