As humans, we’re always looking for ways to do things more efficiently. This is even more pertinent in the blockchain technology and digital assets landscape, where things are evolving rapidly and developments happen on a nearly daily basis.
When crypto was in its nascence, early adopters simply wanted to to find a way for people to make peer-to-peer transactions pseudonomously, mitigating the need for a middlemen to get involved in the process.
Digital assets have come a long way since then, which means their use-cases have increased exponentially - networks like Ethereum are now not limited to simply facilitating transactions, but allowing decentralised applications (dApps) to be built on the Ethereum blockchain.
Early projects like Bitcoin and Ethereum - which belong to the category of Layer 1 blockchain networks, have grappled with the blockchain trilemma: Decentralization; Security; Scalability.
Scalability, in particular, is highlighted as one of the most prominent roadblocks by most networks. With the burgeoning adoption of blockchains and cryptos alike, its exponential growth have put pressure on networks to improve their scalability.
Over the years, many scaling solutions have emerged as a way to reduce the increasing cost of using different blockchain networks.
We break down what scaling solutions are, and the various types of solutions that are commonly used by blockchain networks.
What are Scaling Solutions?
Scaling solutions are meant to increase transaction speed and throughput* of a network without compromising the decentralized nature of a blockchain.
Throughput: The number of transactions the system can process per second.
There are two types of scaling solutions, on-chain scaling and off-chain scaling.
2 Types of Scaling Solutions
On-chain scaling solutions refer to increasing the capacity of the base layer of the network aka Layer-1.
This is usually done by increasing the amount of data that can be fit in a block, improving latency* and etc.
An example of on-chain scaling success is Bitcoin’s implementation of Segregated Witness (SegWit) which reduced the size of Bitcoin transactions that gets stored in the blockchain.
Latency: The time it takes for a transaction to be processed.
Off-chain scaling solutions refer to the indirect scaling of the Layer-1 blockchain by adding more layers to process transactions, without needing to use the core blockchain. It instead utilises the main layer of blockchain as a trust and arbitration layer. It is also often referred to as Layer 2 scaling because of the use of another layer.
There are 4 kinds of Layer 2 solutions:
Channels were the earliest scaling solution. Since it does not support smart contracts and many DeFi applications, it’s popularity has been on a decline. An example include Lightning Network of the Bitcoin network or Celer Network for Ethereum.
Channels permit reduction of the load and transaction cost on layer 1 by allowing to transact a number of times off-chain and submitting two transactions to the network on Layer 1.
Sidechains are independent blockchains that run in parallel to the main layer blockchain. Since sidechains do not rely on the main blockchain’s security, and have their own consensus mechanism, they are believed to be less secure as compared to other solutions.
Sidechains rely on a bridge contract that allows assets to be moved from the main-chain to another blockchain network.
Polygon is an interoperability layer two scaling solution for building Ethereum compatible blockchains. MATIC is Polygon’s native utility token, usually used for governance, staking, and for gas fees.
In order to use Polygon, you have to swap ETH to MATIC through a lock and mint mechanism.
Rollups aim to push the bulk of a transaction volume off the base chain onto a second layer, then it will send the the transaction data back onto the Layer 1 chain.
The latter is key as it allows blockchain operators to check and detect fraud of the transactions that are being computed off-chain if they wish to. Unlike sidechains, rollups still depend on the Ethereum base chain so there is no need to trust a separate set of validators.
Eg. Immutable X
A plasma chain is a seperate blockchain that is attached to the main Ethereum blockchain and uses fraud proofs to reconcile disputes. The use of plasma chains allow for high throughput and and low cost per transaction, and is used by blockchains like OMG Network and Polygon.
We hope this aritcle helped you understand scaling solutions a bit better. Got a crypto term you want us to explain? Tweet us at @coinhako_official or slide into our DMs here
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Disclaimer: All writer’s opinions are their own and do not constitute financial advice. As a company, we do our best to provide information that is accurate and valuable. The contents of this blog post are intended for educational purposes only. Individuals are advised to perform due diligence before purchasing any cryptocurrencies as these assets are subject to high volatility, and understand the risks associated with trading cryptocurrencies.
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