The blockchain trilemma, as introduced by Ethereum co-founder Vitalik Buterin, designates the inherent tension between the critical aspects of blockchain technology – security, scalability, and decentralization. It’s hard, if not impossible, for blockchains to optimize these properties at the same time. This explains why many projects can only provide two out of three benefits, sacrificing either security, scalability or decentralization. Ethereum places emphasis on security and decentralization, which in turn poses challenges to scalability. The network wasn’t conceived to handle the sheer number of transactions dApps demand at present, so Ethereum suffers from congestion, the consequences of which include slower transaction confirmation, increased transaction fees, and poor user experience.
As more and more people use Ethereum, it’s necessary to ensure the system performs well, even under sudden spikes of traffic. Needless to say, it’s not an easy task. Addressing the current technical issues of Ethereum is vital in supporting the mass adoption of the technology, making it more appealing to investors and traders, and eventually driving the ETH price. Ethereum is the only cryptocurrency to have ever challenged Bitcoin for the first place, but it’s the victim of its own success. Until mass adoption is possible, it must deal with its congestion issues. Several solutions are in development to address the problem of scalability, which also burdens the industry’s most outstanding decentralized systems. If you’re curious to find out more, please continue reading.
Layer 1 Scaling Solutions: Ethereum 2.0, The Beacon Chain, And Shard Coins
On 15 September 2022, Ethereum completed the Merge, which introduced Proof of Stake and shard chains. Proof of Stake is a consensus mechanism used to verify new cryptocurrency transactions by which validators stake their coins and create their own nodes. Staking involves locking up a certain amount of ETH into a smart contract, which acts as a security deposit and source of rewards. It’s important to look for an exchange that minimizes your fees. Proof of Stake is regarded as a more scalable consensus algorithm, so it’s mainly used for smart contract platforms that must process countless transactions.
Shard chains didn’t exist in Ethereum 1.0. They represent a scalability mechanism that improves the efficiency of the blockchain, which has been long plagued by throughput issues that hinder performance. The Ethereum network is divided into smaller, more manageable parts rather than having a single chain consisting of consecutive blocks, which requires each full node to process and validate each transaction. Not only does sharding increase processing time, but it also reduces the strain on the network, so Ethereum has become more practical for various applications. Each shard has its own set of account balances and smart contracts because each shard contains an independent state.
Advanced in 2020, the Beacon Chain was meant to run in parallel with Ethereum’s Proof of Work consensus mechanism. During the Merge, the Ethereum Mainnet fused with the Beacon Chain, casting aside the role of miners to assign validators to verify transactions and add blocks to the blockchain randomly. The Beacon Chain was instructed to accept transactions from the original chain, which were then bundled into blocks and organized using Proof of Stake. With the Beacon Chain, Ethereum is equipped to explore different ways of scaling, including rollups and sidechains. The Merge and the Shanghai upgrade are not the end of the story, so we’ll see more upgrades in the future.
Layer 2 Scaling Solutions: State Channels, Plasma, Rollups
State channels enable certain blockchain participants to transact off-chain, therefore keeping interaction with the Ethereum Mainnet to a minimum. It’s much like the idea of payment channels in Bitcoin’s Lightning Network; it’s just that state channels also support state updates. Getting back on topic, peers can carry out a random number of transactions off-chain while only submitting two on-chain transactions to open and close the channel. This improves Ethereum’s scalability by reducing the number of transactions processed by the network and the associated expenses. Suppose a participant rejects confirming the final state or doesn’t respond. In that case, the other party can register the dispute on-chain and submit a smart contract to prove their claim is legitimate.
Plasma is basically a framework that enables the creation of sidechains anchored to the Ethereum Mainnet. These chains use fraud proofs, such as optimistic rollups, for dispute resolution, which operate on the premise that all transactions are valid unless proven otherwise. If a transaction’s validity is disputed, it’s necessary to produce a fraud proof, which is sent to the blockchain for verification. Plasma allows for the Ethereum network to divide up all the transactions to optimize speed and efficiency; if a node of a sidechain wants to, it can submit an exit transaction and export a record to the Mainnet.
Instead of waiting and paying for each transaction to be processed independently on Ethereum, scaling solutions like rollups are used to record transactions on the secondary blockchain network. Vitalik Buterin has drawn attention to the importance of rollups, which, in his vision, represent the future scalability of the network. Compared to optimistic rollups, ZK rollups ensure better security and privacy by using validity proofs, which are commonly used with SNARKs and STARKs. It’s possible to prove knowledge about a piece of data without revealing the information. For the time being, ZK rollups only support the exchange of NFTs and the transfer of ETH between addresses.
The Effort to Scale Ethereum Is a Testament to Its Remarkable Ecosystem
Indeed, blockchain technology was meant to replace traditional banks, but no one could have anticipated its astronomical growth. Scaling is of the essence to increase the number of transactions per second and ensure the future success and sustainability of Ethereum. Following Ethereum, other blockchains ceased to be marginal payment instruments, and the load increased manifold. There’s no point in comparing Layer 1 to Layer 2 scaling solutions because they each present unique benefits for the ecosystem at large. As scaling solutions continue to mature, we’ll continue to see new, powerful dApps and DeFi protocols. Ethereum completed the Dencun upgrade in March 2024, incorporating nine EIPs, including proto-danksharding, which reduces Layer 2 transaction fees.
We can’t wait to hear what comes next!
