Crack The "Impossible Triangle": Overview of Layer 1 Solutions

2021-11-25, 08:53

[TL; DR]

1.Scalability, decentralization, and security are incompatible on blockchain and usually, only two out of three can be achieved simultaneously.

2.Block expansion is arguably the most straightforward solution to increasing Bitcoin's TPS, but it doesn't work as well as many might think. Excessive block enlarging will reduce the security and decentralization of the blockchain system.

3.SegWit increases the number of transactions that can be contained in a block by separating the _script_ signature from the transaction information, thus increasing TPS.

4.DPoS mechanism achieves higher performance at the expense of decentralization by electing a small number of powerful supernodes to do the bookkeeping.

5.One of the impressive feats of the Solana network is the PoH mechanism. It’s a clock invented by Solana for blockchain and separates the blockchain state from the passage of time on the blockchain.

In the previous article “Essentials for Crypto Newbie: What Is Layer 0, Layer 1 and Layer 2?”, we introduced the six layers of blockchain systems, followed by the widely discussed scaling topic: Layer 0/1/2. Since the year 2013, we have witnessed publicly heated discussion concerning scaling issues, and developers have come up with numerous blockchain scaling solutions, some of which have long since been abandoned by the industry, while others are still going strong. In this article, we'll start with a brief overview of a few important Layer 1 solutions.

Before diving into Layer 1, it is important to understand what is meant by the "Impossible Triangle" in the blockchain. In traditional finance, monetary autonomy, a fixed exchange rate, and the free flow of capital are incompatible in countries. This phenomenon is known as the "Mundell-Fleming Trilemma". For blockchain, scalability, decentralization and security are extremely crucial, however, there are many practical experiences showing that only two out of three can be achieved. Once the focus is on solving two of them, another problem will follow. Just as a saying goes that solve one problem only to find another cropping up. Bitcoin, for example, embraces a theoretically infinite decentralization and excellent security, but it does not perform well in terms of scalability, with a TPS of around 10. The concept of the "Impossible Triangle" will be repeated in the rest of our discussion.

In the case of Bitcoin, TPS (transactions per second) = Number of Transactions Per Block/Block Time

Transactions Per Block = Block Size / Average Transaction Size

It takes 10 minutes to create a new block in the Bitcoin blockchain, with each block size of 1Mb. Assuming that the average transaction size is 0.25kb and a block contains 4000 transactions, Bitcoin’s TPS is 7[1024kb/(600s*0.25kb)=7]. According to the formula, TPS = block size / (block time * average transaction size), increasing block size, reducing block time, and compressing transaction size can improve Bitcoin's TPS. However, due to the limitations of the speed of data transfer in the physical world, reducing the block time will greatly reduce the security of the system. That’s why increasing block size and compressing transaction size are the two methods mainly considered.

01 Increase Block Size

Block expansion is arguably the most intuitive solution to increasing Bitcoin's TPS, but it has led to two major forks. In August 2017, some miners in favor of larger block size pooled their computing power and forked Bitcoin blockchain, creating BCH (Bitcoin Cash) and increasing the block size to 8Mb. In November 2018, under the influence of radical members in the BCH community, BCHSV was forked to support the so-called "mega-block" or even "unlimited block".

However, there are many problems with simply increasing the block size. As the size of a single block enlarges, the hardware burden on a single node grows significantly, and nodes that cannot afford the associated hardware will gradually drop out of the network. In addition, the block size increases while the speed of data transfer between nodes and the data processing capacity of nodes hardly improves, which will threaten the security and stability of the Bitcoin system. Therefore, the block size expansion solution actually comes at the cost of decentralization and security.

02 SegWit

When Bitcoin was first designed, Satoshi Nakamoto limited the size of the block containing transactions to 1Mb, where the transaction data contains both the basic information about the transaction and the signature information of traders. The SegWit technology, on the other hand, disguisedly increases the number of transactions that can be contained in a block by about 40% by separating the _script_ed signatures from the transaction information and storing them centrally in the block header, without violating the block audit rules.

Reflected in Bitcoin addresses, those starting with characters such as 3 or bc are Segwit-enabled wallet addresses, while addresses starting with the number 1 are older addresses. A check on Blockchain.com for recent blocks minted shows that most blocks come with Segwit technology. Thanks to Segwit, the actual size of these blocks exceeds 1Mb.

What’s more, Bitcoin has recently pushed for Taproot soft fork based on SegWit, for more details, please read on:
Taproot: What Impact Will it Have on the Bitcoin Ecosystem?

03 Novel Consensus Mechanisms

Layer 1 corresponds to the data layer, network layer, consensus layer, and activating layer in the blockchain logical architecture. While the aforementioned block expansion and SegWit are primarily concerned with the data layer, improvement to the consensus layer is also considered as a solution to improve scalability. Take the PoW mechanism in Bitcoin as an example. It makes it extremely costly for an attacker on the Bitcoin network to both control more than 51% of the computing power and takes an extremely long time to do so. However, given that every node in the system is involved in a fight for bookkeeping rights, transaction verification often experiences a slow process.

EOS transaction speed was over 3000 TPS as soon as it went live in 2017. This impressive transaction processing speed is credited to its innovative DPoS (Delegated Proof of Stake) mechanism based on PoS. In this mechanism, only 21 powerful supernodes have block-created privileges, so the system is extremely fast to verify. The supernodes are elected in a real-world representative democracy, on-chain voting with one-coin-one-vote. However, DPoS requires a high level of performance from the supernodes, at the expense of decentralization and security at the same time.

DPoS has inspired a variety of novel consensus mechanisms such as the NPoS (Nominated Proof of Stake) on Polkadot and among others, which are also similar in principle to DPoS.

04 Other On-Chain Innovations

In addition to the scaling solutions mentioned above, there are projects that have optimized other aspects of the blockchain protocol to achieve significant scalability. A prime example is Solana, a new generation of public blockchains that see increasing popularity this year with a transaction processing capacity of 60,000+ TPS. One of the impressive feats of the Solana network is the PoH (Proof of History) mechanism, which separates the blockchain state from the passage of time on the blockchain. It is not a consensus mechanism, but a clock invented by Solana for blockchain. What’s more, it "decouples" the time on the blockchain from the state of the block itself and changes the fact that each node can’t generate its own local timestamp until updates occur on blocks. There are also some problems with Solana, such as not supporting Ethereum Virtual Machine and the slow development of its ecosystem.

For more information on Solana PoH, please read on
Which Solana Ecosystem Innovations Have Caused Its Price to Surge?

Conclusion

In the end, Layer 1 scaling only focuses on the main chain. For large-scale public blockchains like Ethereum, which have already grown a giant ecosystem, adopting the Layer 1 solution is even more problematic.

At the 7th Global Blockchain Summit on 26 October, Vitalik Buterin delivered a speech calling Layer 2 the future of Ethereum scaling. So what are the Layer 2 solutions, and what do the technical terms like “side chain” and “Rollup” refer to? We will introduce you to them in a later article.

Author: Ashley. H, Gate.io Researcher

*This article represents only the views of the researcher and does not constitute any investment advice.
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