Ethereum, the second-biggest blockchain network in the world, has been suffering from scalability issues for the last few years. The non-scalability of the proof-of-work model shows that blockchains using this consensus mechanism cannot rise above single-digit transaction throughput numbers.
Owing to this, the network is currently undergoing a transition to proof-of-stake, an alternative consensus mechanism that seems to, theoretically, solve the problems of the Ethereum network.
Ethereum’s Clogged Network
Ethereum was launched in 2015 with the purpose of being a decentralized ‘world computer’. The consensus mechanism of the blockchain would allow for many decentralized application to run on it, similar to a cloud deployment with the added security, decentralization and uptime of being on a blockchain.
This quickly manifested as the ‘ICO craze’, wherein multiple individuals began creating coins on the Ethereum blockchain which did not have any purpose except to take money from investors. This caused a lot of new users and transactions on the blockchain, which has a transaction throughput of 15 transactions per second.
The network became clogged and the cost required to use the network increased. This cost, which is designated as ‘gas’, is an amount paid in Ether to the parties that process transactions on the network.
The scalability issues are intrinsic to this consensus mechanism, owing to the fact that all transactions have to be broadcast to the network for every block, and the most secure node is one with all the data of the blockchain. This creates an environment that does not allow for the direct scaling of transaction throughput without increasing the size of individual blocks, which leads to centralization due to inaccessibility.
The Results Of Overload
Miners, those who process transactions on the network, directly take the gas fee for each transaction, which makes them the main deciding authority for the average cost of gas. A transaction with a higher gas cost attached to it will be accepted faster, with a lower gas cost being generally slower due to miners prioritising better returns.
However, when the network is clogged, transactions begin backing up in the memory pool, which is where pending transactions are present. This causes miners to prioritise transactions with higher gas prices, and increase the lowest gas price for confirming a transaction.
This creates a situation where the network’s gas fee goes up to exorbitant levels as the network becomes more clogged, only worsening the situation. This was seen in the case of the viral popularity of the CryptoKitties dApp.
CryptoKitties was a game that allowed users to collect and trade tokenised unique digital cats on the Ethereum blockchain. It underwent an explosion almost overnight, introducing a lot of transactions to the memory pool of the chain.
The number of transaction requests for the network doubled, from 622,000 to almost 1.07 million, almost driven entirely by CryptoKitties. This caused gas prices to inch up, and then skyrocket owing to increased network usage.
How Ethereum Is Planning To Scale
This is just one of the problems that the developers of Ethereum foresaw, with limited scalability being one of the original issues to be addressed on the network. However, the network has only grown in size, and it is difficult to perform upgrades a network that is still being used heavily every day.
Moreover, Ethereum cannot be ‘paused’ for upgrades like a centralised network can. This has created problems for solving the scalability problem, especially since it upgrades the consensus mechanism; the heart of the world computer.
The main proposed change, among others, is a transition to another consensus mechanism known as proof-of-stake. While proof-of-work relies on pure computing power, or ‘work’ to ensure consensus among all participants. This is wasteful of computer power, even though it is being used to secure the network.
Proof-of-stake, on the other hand, functions on more fundamental governing principles. The consensus mechanism puts great focus on identifying and eliminating bad actors from reaching consensus. This is known as Byzantine Fault Tolerance and is an important part of keeping the blockchain running smoothly.
Proof-of-stake aims to reduce the amount of bad actors by forcing them to have skin in the game. Validating nodes are required to ‘stake’ or lock up a certain amount of ETH in a smart contract, the size of which determines the strength of the vote that the party has on the blockchain.
These validators are then assigned the right to propose versions of blocks, with consensus reached after a round of voting to ensure that there is a common shared history with all parties on the network.
This is more efficient in terms of electricity consumed, and is also good for the economy of the network. As there is no need for new coins to be constantly minted to incentivize miners, the network can adopt a deflationary model as opposed to an inflationary one.
Moreover, transaction throughput can also be increased as validators are not required to have a copy of the entire chain, only the state of transactions on the chain.
Proof-of-stake chains are more scalable and sustainable for a longer period of time, and are also more resistant to 51% attacks. The implementation, however, seems far away for Ethereum, at least at this moment.