Back in December 2017, when bitcoin prices soared as buyers speculated that cryptocurrency was on the verge of widespread adoption, a flaw was revealed in the grand plan.
As the number of transactions peaked, so did transaction fees. To send bitcoin, people were paying an average fee of almost $55, and in some cases waiting several days for transactions to settle.
This bottleneck drew attention to the inherent drawback of decentralization: Just as it is easier for a single person to make a decision than it is for thousands to reach consensus, finding consensus over a decentralized network is slower and more difficult than with centralized systems.
This conundrum is at the heart of blockchain, and was neatly summarized by Ethereum creator Vitalik Buterin.
Buterin coined the term scalability trilemma in the early days of Ethereum to explain the 'impossible trinity' of choices blockchain developers are faced with: Scale, security or decentralization.
The structure of decentralized systems means developers can only optimize for two of these qualities.
Scalability—the capacity to process transactions—is measured by the network’s throughput. To fulfil their revolutionary promises, blockchains must be able to accommodate thousands or millions of transactions on the network without compromising on settlement times or efficiency.
Security—the capacity to withstand attacks—is a function of the immutability of the ledger and its ability to resist fraud and malicious threats like 51% attacks.
Decentralization—the idea at the heart of blockchain—is determined by the number of nodes under individual control that maintain the network. The more separate nodes that support the network, the more censorship-resistant the network becomes.
Five years after Buterin coined the term, cryptocurrency projects are still trying to strike the right balance between these three qualities:
Bitcoin and other blockchains relying on proof-of-work consensus algorithms are widely thought to be the most decentralized blockchains. There are now more than 10,000 nodes on the Bitcoin network, but in busy times transactions can still take up to a few days—leading to missed opportunities.
Ethereum offers faster transactions than bitcoin, and attempts to avoid compromising decentralization with proof-of-stake consensus and scaling solutions like sharding. But while there are benefits to this approach, proof-of-stake is still widely considered less secure than proof-of-work.
XRP is secure, scalable, and fast, but it lacks decentralization—the lack of distributed nodes means the blockchain could be shut down more easily than most.
Along with these three cryptocurrencies, hundreds more blockchain projects have emerged, all trying to reach a mainstream audience by optimizing for two of the three properties.
Instead of having “one blockchain to rule them all”, as some anticipated might happen, it now looks like we will have unique blockchains for specific purposes—each occupying a different position on the spectrum of security, scalability, and decentralization.
In this blockchain-powered future, you might take out a business loan using Ethereum, remit funds to family in another country with bitcoin, and then buy a coffee with litecoin.
These chains however are not only unscalable in their present form, but also cannot communicate with each other, making switching assets directly between different blockchains impossible.
This forces users to rely on an intermediary like an exchange, sacrificing decentralization and security.
Layer 2 networks represent a solution to this quandary. These shift transaction computation up to another layer on the blockchain, and then periodically commit completed transactions to the settlement layer.
This optimizes the blockchain for maximum throughput, without sacrificing decentralization or security—resolving the scalability trilemma!
And, blockchain-agnostic Layer 2 solutions can also act as a bridge, allowing assets to be switched between blockchains. This function—known as interoperability—was recently cited by the European Union Blockchain Forum as one of the major roadblocks preventing progress.
Qredo has conceived a network architecture that eases the blockchain bottleneck and facilitates the trading of assets between different chains.
The Qredo network acts as a Layer 2 solution for the tracking and transfer of digital assets. Digital assets are not secured with private keys, but by secure multi-party computation (MPC).
The MPC nodes securing the assets run on the Qredo blockchain, which is built with Tendermint. This is the first blockchain platform to use the Byzantine fault-tolerance (BFT) consensus algorithm, and can scale to thousands of transactions a second with 1-3 second finality.
The Qredo Layer 2 blockchain makes the network more efficient, and can also act as a bridge, breaking the barriers between blockchains by allowing them to transact with each other. This opens up the possibility of scaling horizontally by connecting different blockchains together.
In this way, cryptocurrencies don't need to sacrifice security or decentralization for the sake of scalability, and are able to accommodate widespread adoption.
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