To begin with, let's briefly define the primary blockchain pillars and then delve into the blockchain layers solutions. The integration of decentralisation, scalability and security creates the wrapped triangle known as the blockchain trilemma. Keep reading to learn more about each factor.
Blockchains are naturally decentralised, which means they do not depend on a trusted third party or central authority and provide censorship resistance for data and dapps.
The blockchain's scalability refers to its ability to handle and secure a higher volume of transactions and records. With the growing popularity of Ethereum and its everyday use, the number of transactions would increase enormously, increasing the average time needed to complete a transaction. The major challenge with scalability is how to operate transactions faster without any negative impact on decentralisation and security.
Records and data are guaranteed to be cryptographically secure from various types of attacks, and no one has control over them.
Any blockchain technology contains only two of the mentioned factors and cannot optimise for all three desired features simultaneously. Also, it's no secret that the scalability of blockchains like Bitcoin and Ethereum is currently limited. Networks have resorted to using different methodologies to increase overall scalability, and layer 1 and 2 solutions are applied to rectify scalability issues. The following solutions help us perform each part of the triangle mentioned above.
Layer 1 or blockchain protocols, also referred to as on-chain scaling solutions, need to be decentralised, secure and scalable. PoS, PoW and Sharding are layer one solutions that seek to achieve all the aspects and undertake all three blockchain features. Layer 1 is also known as the implementation layer; for example, Bitcoin is a layer one blockchain.
PoW and PoS are two common consensus mechanisms across blockchain that are applied to tackle the scalability problems. Read the full report of these to utilise consensus from here.
The process of dividing a large database into a smaller database is known as sharding, and each separated database block is called a shard. These shards are not only smaller but also faster and hence easily manageable. Sharding is one possible method of enabling Ethereum to store larger amounts of data. Ethereum 2.0 is one high-profile blockchain protocol exploring the use of shards, along with Zilliqa, Tezos, and Qtum.
Layer 2 solutions or off-chain scaling solutions are built on the Ethereum blockchain. Layer 2 is an auxiliary framework that increases the transaction speed, enabling the system to manage more users. Additionally, it improves scalability and efficiency in reducing the layer one workload. Two significant examples of layer two solutions are the Bitcoin Lightning Network and the Ethereum Plasma. State channels, sidechains, rollups and plasma are some of the layer two scaling solutions that will be explained in the sections below.
To streamline State channels operations, we first need to learn what off-chain is. Off-chain data is any non-transactional data that is too large to be stored in the blockchain efficiently or requires the ability to be changed or deleted. State channels are layer two scaling solutions that allow a group of participants to perform an unlimited number of private, secure, fast and low-cost transactions off-chain and directly outside of the blockchain.
State channels don't require immediate miner involvement to verify the transaction, and therefore the participants can perform as many transactions as they desire to improve scalability. The Liquid Network, Celer, Bitcoin Lightning, and Ethereum's Raiden Network are examples of state channels.
A side chain is essentially a unique blockchain linked to another main blockchain. Sidechains help blockchains to scale, develop, interact, and come with their own consensus mechanisms. Sidechains offer layer two scaling solutions because they can record each transaction with fewer verifications to reduce congestion and facilitate scalability. Plasma, Matic, Liquid, Rootstock and Alpha are some examples of popular sidechain solutions.
Another crucial solution to tackle the scalability issues, reduce fees, increase transaction throughput, and expand participation is rollups. Rollups perform transaction operations off the main Ethereum blockchain but post the transaction data into layer 1. As transaction data is on layer 1, rollups are secured by layer 1. Generally, there are two types of rollups, optimistic and zero-knowledge.
Optimistic rollups are based on the main Ethereum chain on layer two and are designed to improve scalability. They also write all the transactions on the Ethereum chain, optimise them and reduce the gas fee.
Zero-knowledge rollups or zk-rollups are Layer 2 scalability solutions that allow blockchains to validate transactions faster and submit validity proof. One of the main components that aids zk-rollups to verify transactions faster than Layer 1 blockchains are Merkle Trees or Hash Trees that are used to encrypt blockchain data more effectively and securely.
Plasma is another Ethereum second-layer scaling solution in development with High throughput, low cost per transaction and similar to state channels. A plasma chain is a separate blockchain embedded in the main Ethereum chain. It allows the creation of ‘child’ blockchains to implement the main Ethereum chain as a trust and arbitration layer. It will handle smart contracts much like its foundation but will only distribute completed transactions to the public Ethereum chain to help speed up transactions enough to let decentralised apps operate without worrying about the backlog.
As the demand for cryptocurrencies grows, so will the pressure to expand blockchain protocols. Hopefully, we have identified the blockchain scalability and layers solutions. Putting it all together, blockchain technology and what comes from this novel innovation are innumerable. Cryptologist.st is one of the best places to explore nuts and bolts and educate yourself with helpful content. Despite all we offer you, we are not financial advisors!
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