The Scalability Conundrum of Blockchain Networks

“But what about scalability?”

Blockchain technology awareness levels have gone up. The level of excitement is high. Peer pressure is mounting. Yet, the scalability question never fails to come up in a blockchain conversation with the enterprises.

The enterprises’ fear of scalability is completely justified. The suppliers of the blockchain technology understand the bottleneck.

Let’s look at the scalability issues and the initiatives underway to unlock the puzzle.

Why is scalability important?

Scalability is the ability of the technology or the system to scale-up to meet the growing demands. With an explosion in data and rising customer expectations on negligible latency and high quality, enterprises are working harder and harder, to crank up the underlying plumbing.

Naturally, enterprises don’t want to get caught in a set-up that doesn’t deliver. The fear is in introducing a nascent technology, like blockchain, that might set them back on the scalability index. Having learnt from past experiences, enterprises will be ultra-careful in disturbing an ecosystem “that works”.

The Challenges

The scalability challenges of the blockchain network emanates primarily from the need to balance the core tenet of decentralization versus the performance. Bitcoin, the public blockchain network, is horizontally scalable (additional nodes can join and participate in the network at ease), but not vertically scalable (struggles from throughput, commonly referred to as transactions-per-second TPS).

At its core, there are three key factors affecting the scalability of the public blockchain networks like bitcoin:

  • Block size and block creation time: The size of the bitcoin block is fixed at 1 MB. Each 1 MB block can hold between 2000-4000 transactions. The bitcoin protocol is tuned to throttle the creation of blocks— one block created approximately every 10 minutes. This results in a horrid 3-7 TPS.
  • Consensus protocol: The consensus protocol defines the rules and guidelines for participating in the blockchain network. The Proof-of-Work (PoW) consensus protocol used in bitcoin is a winner-takes-it-all game. Of the competing miners, racing to create the next valid block, only one can win. The natural inclination for the miners is to choose high-value transactions to maximize the gains vis-à-vis the resources and money spent in the mining process. This creates a bottleneck for low-value transactions and they end up waiting longer in the queue.
  • Confirmation times: Creating a valid block is no guarantee of a transaction finding its permanent place in the blockchain database. Blocks (and transactions) can be reversed due to soft-forking (a state where multiple chains might exist concurrently and eventually the longest one wins) or invalidation of the transactions/blocks. As a thumb rule, it is advised for at least six confirmations, in turn delaying the transaction confirmations.

The Solutions in the Horizon

In the case of the public blockchain networks, a variety of solutions are being explored at layer one (the core blockchain network) and layer two (outside the core network), to overcome the performance and scalability challenges. Few notable solutions are:

  • Increasing the block size: Increasing the block size and reducing the time to generate blocks is a simple and straightforward (and a controversial) option. This was the cause of a heated debate in the bitcoin community, before the bitcoin-cash split from bitcoin.
  • Reducing the information in the transaction: By separating the essential and non-essential information/data from the transactions, the number of transactions accommodated within a block can be increased. This would result in more transactions per second. SegWit (or Segregated Witness) is one such change enacted on the bitcoin blockchain network.
  • Consensus protocols: Another layer one solution is to change the consensus protocol, to boost the network performance. While PoW is still being used in the public blockchain networks like Bitcoin and Ethereum, newer networks are experimenting with a variety of protocols, like Proof-of-Stake (PoS) and Proof-of-Authority (PoA), to unlock the performance grid.
  • Off-chain solutions: Off-chain solutions are layer two options, outside of the core blockchain network. The core premise is to off-load the burden on the main network, by execution certain work outside.  

The Enterprise Options

Scalability issues are accentuated in the public blockchain networks, where the overpowering need for decentralization must be balanced with the performance. On the contrary, enterprises are unlikely to jump a public blockchain network any time soon. Most of them are going to operate as private/permission networks and with a smaller set of known participants. Enterprise blockchain flavors available in the market today, in addition, provide the ability to configure block sizes, generation times, and to pick and choose the consensus protocols. A combination of these factors should help enterprises achieve better throughputs.

While the scalability concerns of enterprises are valid, scalability as a barrier to the adoption is crumbling. This is a healthy sign and should boost up the confidence of enterprises to surge ahead.

This article was first published at Entrepreneur.com