Blockchain’s moon race for enterprise-level scalability is on, with distributed ledger technology coming a long way since the Bitcoin whitepaper emerged in 2008. As platforms, utility, and adoption have continued to grow, one persistent issue has remained: scalability.
A crypto researcher with a computer science and philosophy background recently published an interesting analysis of blockchain scaling following a mission to find a platform that could underpin an alternative infrastructure to the traditional financial system. Analysis of the solutions available led to a focus on layer 1 smart contract platforms for decentralized applications (dApps). These types of platforms were identified as the best candidates from an investment strategy perspective as they are wider in scope with the most room for value growth, according to the researcher.
The result is a research guide framed around the key questions that investors should ask themselves in order to identify the platforms with the most potential to replace existing systems:
How Does the Ledger Scale?
Does the solution scale via sharding? Are the scalability claims referring to simple value transactions or more complex smart contract transactions?
The use case of transactions has increased in scope over time. Simple value transactions are user-to-user, such as people sending ETH to each other. Smart contract transactions are of two types: user-to-dApp and dApp-to-dApp. User-to-dApp transactions, for example, when playing CryptoKitties, are where many concurrent users want to interact with a particular dApp. dApp-to-dApp transactions, for example, are used in arbitraging where different applications are interacted with to lend, swap, transfer, swap back, repay loans, and keep the profit.
As these use cases have increased, so has the required scope of solutions, meaning that platforms need to deliver scalability to all three types of transactions without trading-off the two other characteristics of the original blockchain trilemma hypothesis: security and decentralization.
It should also deliver atomic composability – the interoperability between users and various dApps for the seamless grouping of transactions committed as one. This quadrilemma in obtaining atomic composability as well as scalability, security, and decentralization was introduced by the dominant proposed scaling solution to date: sharding.
Atomic Composability Across Shards?
If atomic composability across shards is not maintained, does this impact the functionality of the dApps on-ledger? Does this impact the dApp developers? Does this impact capacity or capabilities?
Whether using a hub-and-sidechain architecture (like Cosmos or Polkadot) or by running a static set of blockchains in parallel (like Ethereum 2.0), sharding solutions allow for far greater levels of scalability in transaction throughput. However, they can break the atomic composability characteristic that was taken for granted in unsharded yet less scalable shared environments, so vital to the requirements of the latest generation of DeFi applications.
Given that transactions on a sharded ledger happen on different (cross) environments (shards), it can be hard to coordinate multiple transactions to commit at the same time. This could be resolved by either grouping dApps that are regularly combined in the same shard, though with scalability limitations again, or by settling with sequential cross-shard commits, though this is more complex for developers and fails DeFi use cases that rely on cross-shard-atomicity.
So sharding works to solve the blockchain trilemma but for it to work as a quadrilemma solution for decentralized finance, cross-shard atomicity is required.
If Not Via Sharding, How Then?
How does this alternative scaling solution impact the three other points of the quadrilemma?
Layer 2 scalability solutions are often cited as an alternative to sharding. The need for a layer 2 suggests that layer 1 cannot do something, however, and is arguably another symptom of a layer 1 lacking capabilities or capacity. Simply introducing another layer does not solve the quadrilemma, and transactions on that layer are still subject to the same four characteristics by which distributed ledger technology can be assessed.
If layer 2 solutions are developed for scaling purposes only, they will lack composability and may decrease security and decentralization, increasing the potential attack vectors available to disrupt the network.
While transaction throughput can be gained via layer 2 with significant cost reductions, if in the end, it all needs to be committed back to layer 1 for settlement or interoperability requirements, bottlenecks in throughput and cost will result again.
What About All the Other Metrics?
Scaling and composability are only two factors to consider when evaluating a layer 1 platform, though a focal point right now. The guide suggests assessing these two first and then researching other factors to see the big picture and evaluate the protocol overall:
- Security
- Decentralization
- Gas/transaction fees
- Transaction finality type and time
- Smart contract programming language
- Developer incentives
- Tokenomics
- Governance
Next-Generation Blockchain Solutions
The research guide does not provide direct answers for investors, though it delivers a framework to determine the characteristics of scaling platforms that offer the most value. What is inferred is that almost all platforms capable of providing the alternative decentralized finance infrastructure required scale by sharding, but break the functionality that was available before sharding that is so vital to DeFi applications. The ability of sharding technology to solve the blockchain trilemma often fails to recognize that it introduces a quadrilemma instead, and what use is scalability, security, and decentralization without applications?
Thankfully, a new generation of sharded layer 1 blockchains like Radix deliver the promise of all four characteristics. Radix uses a unique pre-sharded data structure and Cerberus consensus design specifically built to prove the concept of scaling DeFi without breaking composability. It removes the barriers between shards, allowing them to operate independently and in parallel, bringing shards together temporarily into one for each transaction as required, meaning that composability is as frictionless as on a single blockchain, without the scalability limits.
Alongside its own functional programming language, Scrypto, and the Radix Engine secure development environment with built-in developer incentives, its future-proof solution to the blockchain quadrilemma offers the promise of the institutional-grade yet decentralized infrastructure needed to truly disrupt legacy finance.
Published February 28th, 2021