It has been more than 10 years since the blockchain technology was first introduced. The technology has again and again proven its usability. As more and more people adopt decentralised blockchain solutions, the industry is faced with a trilemma. Known as the blockchain trilemma, the issue refers to providing decentralisation, security, and scalability all at the same time. 

In a blockchain, decentralization refers to the transfer of control and decision-making from a centralized entity (individual, organization, or group thereof) to a distributed network. At the same time, the blockchain must offer security. Security is considered a non-negotiable aspect of a blockchain network. 

The third aspect is scalability, which refers to a blockchain network’s ability to support high transactional throughput. As more and more people start using cryptocurrency, transaction processing must be increased. 

A common comparison to indicate the scalability issues is that Bitcoin processes between 4–7 transactions per second (TPS). Visa a centralised network, on the other hand, processes approximately 1,700 TPS. In order to compete with these legacy systems, blockchain technology must match or exceed these high levels of scalability.  Visa Chief Financial Officer Vasant Prabhu said in a recent interview with Barron's, its network can scale up to 65,000 transactions per second. “True cryptos aren't fast enough for purchase transactions,” he said. You cannot claim to replace Visa with a TPS of 7!

Scalability is an important aspect as it represents the only way for blockchain networks can challenge the legacy, centralized platforms. There now exists a whole start-up sector of the blockchain industry that is working towards improving scalability and solving the trilemma. These projects can be categorised into Layer-1 and Layer-2 scaling solutions.

Layer-1 Scaling Solutions:

In the blockchain ecosystem, a Layer-1 network refers to a blockchain, while a Layer-2 protocol is a third-party integration that can be used along with a Layer-1 blockchain. Some examples of Layer-1 blockchains are Bitcoin, Litecoin, and Ethereum. Bitcoin Lightning Network is an example of a Layer-2 solution. 

Layer-1 solutions change the rules of the main protocol to increase transaction capacity and speed while accommodating more users and information. Layer-1 scaling solutions can be related to increasing the amount of data contained in each block, or accelerating the rate at which blocks are confirmed, so as to increase overall network capacity. For example, in 2010, Satoshi Nakamoto established the rule that the maximum block size cannot exceed 1MB in size. In 2017, that limit was altered via the SegWit upgrade, which raised the limit to 4MB.

Consensus protocol improvements: 

Another way to scale a blockchain at the Layer-1 level is by making consensus mechanisms are more efficient than others. Proof of Work (PoW) is the consensus protocol currently in use by Bitcoin. Although PoW is secure, it is found to be slow when compared with other algorithms like Proof of Stake (PoS). PoS mechanisms have proven to be efficient when meeting the requirements of mass adoptions. 

Instead of requiring miners to solve cryptographic algorithms using substantial computing power, PoS systems process and validate new blocks of transaction data based on participants staking collateral in the network. With Ethereum 2.0, Ethereum will transition to a PoS consensus algorithm, which is expected to dramatically and fundamentally increase the capacity of the Ethereum network while increasing decentralization and preserving network security.

Sharding: Another proposed technique to increase the scalability of a blockchain is known as sharding. Sharding means breaking the database into multiple sets known as "shards" — a more manageable task than requiring all nodes to maintain the entire network. By separating the non-essential data network congestion will be reduced resulting in an increase in transactions per second. The non-essential data or the data separated from the main dataset is simultaneously processed in parallel by the network, allowing for sequential work on numerous transactions.

Further, not every node is required to maintain a copy of the entire database, thereby relieving stress on the network nodes. According to the Ethereum foundation website, Ethereum will undergo sharding in 2023. 

Layer-2 Scaling Solutions
 

Layer-2 solutions scale blockchain by shifting a portion of a blockchain protocol’s transactional burden to an adjacent system architecture, which then handles the requirement of the network’s processing and only subsequently reports back to the main blockchain to finalize its results. By abstracting the majority of data processing to auxiliary architecture, the base layer blockchain becomes less congested and ultimately more scalable. These techniques may also be referred to as “off-chain” scaling solutions.

For instance, Bitcoin is a Layer-1 network, and the Lightning Network is a Layer-2 solution built to improve transaction speeds in this fashion on the Bitcoin network. Other examples of Layer-2 solutions include:

Sidechains: A sidechain is a blockchain adjacent to the main chain but is a separate chain equipped to transact a large batch of transactions. Sidechains use an independent consensus mechanism — i.e., separate from the original chain — which can be optimized for speed and scalability. With a sidechain architecture, the primary role of the main chain is to maintain overall security, confirm batched transaction records, and resolve disputes. 

One example, of the sidechain, is the Liquid network that uses a Liquid bitcoin (L-BTC) as its main asset and a unit of account. L-BTC can be obtained in two ways. First is through a peg-in process, where the user sends bitcoin to a Liquid federation multisig and waits for confirmations, after which L-BTC is minted on the Liquid sidechain. The second way is to trade BTC for L-BTC on an exchange (e.g. WazirX or Binance). In this way, you lock your BTC and get a more scalable equivalent BTC. The reverse of the peg-in is the peg-out: exchange of L-BTC back to BTC.

Sidechains are differentiated from state channels in a number of integral ways. Firstly, sidechain transactions aren’t private between participants — they are publicly recorded to the ledger. Further, sidechain security breaches do not impact the main chain or other sidechains. Establishing a sidechain might require substantial effort, as the infrastructure is usually built from the ground up.

Nested blockchains: A nested blockchain is essentially a blockchain within — or, rather, atop — another blockchain. The nested blockchain architecture typically involves the main blockchain that sets parameters for a broader network, while executions are undertaken on an interconnected web of secondary chains. In other words, Layer 1 sets the parameters while the nested Layer 2 blockchain executes the processes.

Multiple blockchain levels can be nested on the primary chain, with each level using a parent-child connection. The main chain delegates work to nested chains that process the transaction and report to the parent after its completion. The main blockchain does not take part in the network functions of secondary chains in normal circumstances. The main chain may get involved in case of dispute resolution. 

The distribution of work under this model reduces the processing burden on the main chain to exponentially improve scalability. The OMG Plasma project launched in 2017 is an example of Layer-2 nested blockchain infrastructure that is utilized atop the Layer-1 Ethereum protocol to facilitate faster and cheaper transactions.

State channels: A state channel facilitates two-way communication between a blockchain and off-chain transactional channels and improves overall transaction capacity and speed. A state channel does not require validation by nodes of the Layer-1 network. State channels perform blockchain operations easing congestion on the main chain and reporting them to the main chain. State channels are mainly used as payment channels. 

When a transaction or batch of transactions is completed on a state channel, the final “state” of the “channel” and all its inherent transitions are recorded to the underlying blockchain. Celer, Bitcoin Lightning, and Ethereum's Raiden Network are examples of state channels. In the Blockchain Trilemma tradeoff, state channels are sometimes centralised to some extent to achieve scalability. 

Boosting Blockchain Networks’ Scalability
Layer-1 and Layer-2 scaling solutions are two solutions to the scalability question of a blockchain. Not all strategies may work for every blockchain. A common tradeoff can be decentralisation. As technology evolves, more creative solutions may be offered to achieve scalability without compromising on decentralisation and security of a blockchain.