The issue of scalability in the cryptocurrency space has been a concern for many. However, Layer 2 blockchain technology could provide solutions to crypto scalability problems such as transaction throughput.
To answer the question of whether scalability has been solved, we will take a look at the transaction throughput of popular payment processors like Visa and compare the figures to popular cryptocurrencies like Bitcoin and Ethereum. In doing so, we will also compare a current Layer 2 solution for both Bitcoin and Ethereum, respectively.
Why do we need to scale?
Since its release, Bitcoin transaction times have slowed down and the fees have risen. It is still cheaper to complete transactions with Bitcoin, but it is also significantly slower compared to Visa or PayPal. The trade-off between Bitcoin and mainstream payment processors is cost against speed.
Bitcoin’s issues are largely tied to its block size, which limits the amount of transactions that can be processed per second. There are options to help remedy this, such as removing the block size limit or simply doubling the block size. However, there isn’t a consensus worldwide as to which method is more suitable.
This is where Layer 2 solutions come into play. Layer 2 solutions aim to provide an answer to scalability issues within the cryptosphere.
How do Bitcoin and Ethereum compare to Visa?
Before Layer 2 solutions were implemented into cryptocurrencies, the transaction throughput figures were quite low. Bitcoin is thought to have a transaction processing capacity of roughly three to seven transactions per second. The actual number has been debated for a while, but either way, it is a staggeringly low number.
Ethereum hasn’t been too special in this regard either. Before the recent update to its Layer 2 solution (Ignis), it was thought that Ethereum had a transaction throughput of 15 transactions per second.
Visa, on the other hand, are a global behemoth. It is thought Visa’s transaction throughput is between 20-30,000 transactions per second. It should go without saying that Bitcoin and Ethereum’s figures pale in comparison. Since the crypto market has a market capitalisation of around $120 billion at the time of writing, it isn’t hard to see why scaling solutions are needed in the cryptosphere.
Bitcoin and the Lightning Network
The Lightning Network is a popular Bitcoin Layer 2 solution. It is a payment protocol that operates on top of cryptocurrencies, providing faster transaction times between nodes. At its core, it is a decentralised system for instant and high-volume micropayments.
The way the Lightning Network works is by opening a payment channel committed to funding a transaction to the relevant base blockchain (otherwise known as Layer 1). This is then followed by any number of Lightning transactions that update the distribution of the channel’s funds without broadcasting to the blockchain. This is then optionally closed by shutting down the payment channel and broadcasting the final version of the transaction to distribute the channel’s funds.
For further information on the Lightning Network, click here.
In theory, the Lightning Network can process millions of transactions per second, providing the channel is funded. However, this is dependent on a couple of factors, including how much Bitcoin is being sent and the overall liquidity of Bitcoin. So, in effect, there isn’t a concrete value for total transaction throughput with the Lightning Network.
Ethereum and Ignis
Ethereum, on the other hand, is driven by zk-SNARKs, which stands for ‘Zero-Knowledge Succinct Non-Interactive Argument of Knowledge.’ This refers to a proof construction where one can prove possession of certain information whilst not disclosing any of that information. This occurs without any interaction between the prover and verifier.
The recent Ignis upgrade is thought to have increased the transaction throughput of Ethereum from 15 all the way to 500, which is a significant increase. However, this is an estimate by the Matter team who developed the update. They also stated that a block cannot accommodate more than 500 transactions.
zk-SNARKs takes into account verifiable state transitions which relate to the ‘correctness’ of each transaction included in the next block. These must be proven through the use of zero-knowledge proofs.
For more information on the Ignis update, click here.
Is scalability solved?
The answer to the overarching question of whether scalability is solved is not definitive. This is because whilst Layer 2 scaling solutions have made ginormous progress, the issue hasn’t exactly been solved completely just yet. There is still a long way to go before many Layer 2 scaling solutions can rival the transaction throughput of Visa and other mainstream payment processors.
Considering the cryptosphere is still in its infancy stage, scaling solutions have come a fairly long way in a short space of time.
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Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.