Cryptocurrency is currently a speculative bubble, since not many of its promises have been fulfilled. Volatility is rampant, ICOs fold by the day, and FUD (fear, uncertainty and doubt) are on the rise. Some of the criticism of cryptocurrency comes from the enormous buildup in market cap over the last three months from just under $200 billion in November 2017 to $829 billion in January 2018. It’s clear people are jumping on these investments, but what is there to show for it?
There’s growing skepticism this massive investment stockpile will lead to a crash and burn scenario like the dot com bust of the early 2000s. For some cryptocurrencies, it is going to happen. Demise is inevitable for cryptocurrencies and crypto platforms that can’t scale to meet market demands.
Simultaneously, the bubble is growing blockchain startups and ICOs, bringing talented people to the industry and creating funds for innovation. The pressure is on for Bitcoin and Ethereum, amongst others, to adapt and survive. But this isn’t simply a “survival of the fittest” Darwinian scenario. There’s a whole world of possibilities because of this emerging crypto economy. The promises of decentralized digital currency, user-owned social platforms, safe voting systems, and DAOs are behind the push for innovation in the blockchain and beyond.
Blockchains are currently limited in their ability to process massive amounts of transactions quickly. To give an idea of the scale Bitcoin and others need in the current economic world: Visa handles an average of 2,000 transactions per second (TPS), but has capability to process 56,000 TPS. PayPal operates at 193 TPS, while Ethereum currently handles 20 TPS, and Bitcoin lags even further at about 6 TPS. However, Ethereum is currently handling more transactions than all other cryptocurrencies combined without noticeable cost or lag, while Bitcoin regularly has massive fees and multi-day transaction times.
Working on Scale: Blockchains and DAGs
On Ethereum, developers are collaborating on the open-source platform, working on Raiden and sharding as potential solutions. The Ethereum Foundation is offering millions in grant money to anyone able to help them solve the scalability problem. Developers for Bitcoin have started a testnet for the Lightning Network with hopes of off-chain settlement as a boost. IOTA,Hashgraph, Byteball, and NANO (formerly called Raiblocks) are also working on an alternative platform to the blockchain using a Directed Acyclic Graph (DAG).
Blockchains: Why the Struggle is Real
Both Bitcoin and Ethereum, the two biggest market cap blockchains are decentralized and Proof of Work based models. Their decentralization comes in the form of a distributed ledger shared by all nodes trading on the networks. Unfortunately, the network is only as fast as its slowest individual node. Blockchain consensus protocols like Bitcoin, Ethereum, and Ripple all rely on every node in their entire network to validate every single transaction.
Every time you want to send money to a friend or get paid, thousands of nodes process your transaction and maintain a copy of it, along with every single other transaction on the ledger ever. Since every single node has to process the same thing, and the speed of transactions the blockchain processes can never exceed what one individual node can handle.
Scalability Issues on the Blockchain
When it comes to whether cryptocurrency will boom or bust, the topic on everyone’s minds is scalability. If cryptocurrency can’t compete with the way we do business today, its future is grim. Scalability is the big problem holding back cryptocurrencies like Bitcoin and Ethereum from mass adoption.
The Limits of Node Confirmations
Blockchains like Bitcoin and Ethereum work by sending a transaction over a P2P network of computers called nodes. Every node carries a copy of the entire history of transactions, called a ledger. The nodes validate the request using algorithms, and once verified, the transaction is added with others to a block of data to be added to the ledger.
When a block is added, all the nodes see it as a permanent record of the transactions. When tons of transaction requests hit the blockchain, the nodes can only validate and verify so many at a time, resulting in bottlenecking, where people waiting to send money have to wait until a node adds their transaction to the block.
The simple solution is to have a smaller group of nodes validate each transaction, but this removes the safety net of a decentralized blockchain where every node validates, so there’s no chance of fraudulent transactions.
Blockchains: Chances of Scalability
Proof of Work has strength in decentralization, but it will need off-chain settlement like SegWit for Bitcoin and Raiden for Ethereum.
For Bitcoin, the promise of decentralization is core to its values, and there are many current debates on the best method to scale while remaining decentralized. Currently, there are a number of experiments trying various solutions, such as increasing the block size and adding Lightning Network.
The Ethereum Foundation is currently pouring development into sharding as a way to increase scalability. This would divide the network into a series of smaller networks that constantly check in with each other, vastly increasing the speed of the overall network.
For sharding to be successful, Ethereum needs a way to ensure the subset of nodes validating transactions are trustworthy. Sharding sounds like a simple solution that would allow faster transactions and reduced bottlenecking on the Ethereum blockchain. There were a lot of issues to solve to make sure every shard had the correct information, but they have developed ways for them to verify without having to download the entire blockchain.
Directed Acyclic Graphs and the promise of Infinite Scalability
Directed Acyclic Graphs or DAGs are shaking up the crypto world as a potential alternative to the blockchain and solution to all of these problems. IOTA’s promise of a scalable model based on “The Tangle” promises every transaction coming in must confirm two others. While IOTA’s model is focused on micro transactions between smart devices, Hashgraph, Byteball, and NANO (formerly Raiblocks) are focused on currency exchange and other uses.
Chances of Scalability with DAGs
As more people send money over a DAG platform, more transactions are confirmed, and so the system speeds up as it gains a larger adoption, unlike blockchains, which do the opposite. Currently, everything is in projection and still theoretical, but DAGs could change not only the scalability model, but the cryptocurrency world as a whole.
While blockchains are based on binary coding (0 and 1 as inputs), IOTA’s Tangle uses balanced ternary logic using -1, 0, and 1. Communications between binary nodes and a ternary DAG could lead to settlement problems and ruin the chance of scalability for DAGs.
Other DAG-based platforms including Hashgraph’s algorithm could surpass this issue, along with other security risks. Hashgraph estimates 100,000 TPS and includes a timestamp on each transaction to prevent fraud or false consensus as information is shared among nodes in a gossip protocol.
DAG-based cryptocurrency holds huge potential to solve the scalability problem, but it remains to be seen in action.
Scalability is one of the biggest problems for cryptocurrency right now, but it’s not likely to be a problem forever. The solution remains to be tested in Raiden, sharding, SegWit, DAGs, or new platforms based on other consensus algorithms. It’s only a matter of time before someone finds a solution, and others improve it, and a scalable, secure working platform is in reach. From there, the sky’s the limit, not just the block size.