Blockchain scalability

When Visa expanded its stablecoin settlement to Solana in September 2023, with the merchant acquirers Worldpay and Nuvei, its press release named the reason: demand for chains that send and receive stablecoins "with higher speed and lower costs". The release put Solana at 400 millisecond block times and an average of 400 transactions per second, rising to more than 2,000 at peaks.

A payment network sizes itself for its busiest hour. A chain that is cheap on a quiet day and expensive on a busy one is hard to price into a merchant fee. Applications for stablecoin payments depend on these network costs and transaction speeds.

Ethereum co-founder Vitalik Buterin described the trilemma in his 2021 post Why sharding is great. A chain is scalable when it processes more transactions than a single regular node can verify, decentralized when it runs without depending on a small group of large actors, and secure when it resists a large share of nodes attacking it. With simple techniques a chain gets two of the three.

The Bank for International Settlements looked at the economics in its bulletin Blockchain scalability and the fragmentation of crypto from June 2022. Validators of permissionless chains are paid through fees, and the BIS finds that this incentive brings congestion and high fees with it. The fees push users to other chains, and the newer chains gain capacity at the cost of more centralization and weaker security. Because their designs differ, the chains cannot work with each other, which the BIS says keeps network effects from taking root.

The Ethereum documentation on scaling separates on-chain scaling, which changes the base protocol, from off-chain scaling built next to it. Rollups are one off-chain method: they execute transactions outside layer 1 and post the data back to it. Optimistic rollups treat a batch as valid unless someone challenges it, and zero-knowledge rollups submit cryptographic zero knowledge proofs.

Wholesale projects take a third route. A permissioned blockchain runs with a known set of regulated operators, so there is no fee auction among anonymous validators. Project Agora of the BIS and seven central banks tests this model for cross-border payments. Moving value between chains of different designs is the job of cross-chain messaging.

Finance Loop covers the networks behind on-chain settlement in stablecoin payments, the ECB projects Pontes and Appia and the regulated liability network. Finance Loop events in Frankfurt bring together people from banks, payment firms and the Bundesbank who work on tokenized money.

The blockchain trilemma is the claim that a blockchain built with simple techniques can have only two of three properties: scalability, decentralization and security. Vitalik Buterin defined the terms in 2021, and rollups and sharding are attempts to get all three.

A block has limited space and validators are paid through fees, so congestion raises the price of getting a transaction into the next block. The BIS describes this link between validator incentives and high fees in its 2022 bulletin.

Transaction throughput depends on the blockchain; the 2023 release from Visa gave Solana an average of 400 transactions per second with peaks above 2,000. Rollups add capacity on top of a base chain such as Ethereum.

Scalability is less of a problem for permissioned blockchains, which have a fixed set of known operators and no fee auction among validators. Permissioned ledgers give up open access in return for these arrangements.