2021 has been a watershed year for blockchain technology, with several new trends prompting a rethink of financial possibilities. Non-fungible tokens (NFTs) in the Metaverse, Exchange-traded funds (ETFs), and Decentralized Autonomous Organizations (DAOs) have become mainstays bringing with them more adoption of crypto. These innovations have seen businesses worldwide adopt blockchain solutions bringing about considerable investments in the space.
Financial payment company TripleA estimates that the total number of crypto users exceeds 300 million. This claim is substantiated by data provided by Chainalysis, which shows that as of Q2 2021, global adoption was at least 880% higher than 2020.
Growing Adoption Poses Scaling Problems
As more users and investors come into the crypto ecosystem, the problem of scalability poses a challenge. As adoption grows, the need for faster transactions and increased throughput also goes up. However, scaling up in the industry brings up the age-old belief of the blockchain trilemma.
The blockchain trilemma refers to the widely held notion that decentralized networks can only provide two of three benefits (decentralization, security, and scalability) at a time. The industry is rife with examples of this challenge.
Bitcoin can only transact around seven transactions per second (TPS) with its decentralized and secure system. Ethereum has a throughput not greater than thirty TPS. On the other hand, Enterprise blockchains like Hyperledger’s Fabric are safe and can handle high transactional throughput but are centralized.
FTX CEO Sam Bankman-Fried (SBF) praised the current scaling efforts but pointed out the need for more to be done. He shared his thoughts on Twitter, where he detailed a possible roadmap for the industry in 2022.
Scaling Efforts in 2021
As SBF pointed out, several innovative solutions to the scaling problems came about in 2021, with transaction throughputs significantly rising. The limited transaction throughput of the Ethereum network coupled with its high gas fees led to innovative solutions. These can be categorized under;
- New layer 1 blockchains
- Sidechains, and
- Layer 2 networks.
While each has a different architecture and method, the purpose is the same. They all let users interact however they want (e.g., DeFi, NFTs, etc.) without paying high fees or having long wait times.
Over the year, several new layer 1s emerged, offering faster transaction speeds with significantly lower costs. Solana, Avalanche, Terra, and Fantom has all grown considerably in 2021. The aggregate value of these ecosystems skyrocketed to over $70 billion, with Solana, Terra, and Avalanche each having over $10 billion locked. The growth of these L1s is such that their native tokens now sit comfortably amongst the top ten cryptocurrencies by market capitalization.
Sidechains like Axie Infinity’s Ronin and Polygon’s proof of stake (POS) sidechains have also helped improve scalability. The Ronin sidechain has allowed players to move their NFTs and tokens from Ethereum to a low-fee environment.
Since its deployment in February, Axie Infinity has witnessed explosive growth in users. From less than 100 hundred thousand to over 2.5 million by November 2021, with more than $7.5 billion moved into the sidechain.
While the Ronin sidechain is specific to a Dapp, the Polygon POS offers a more general application. It has become an industry leader with over $5 billion deployed in over 100 games and applications on the blockchain.
Unlike L1s, which compete with Ethereum, Polygon POS envisions a future where Ethereum continues to be the dominant blockchain. It will be used for high-value transactions and value storage while daily trades shift to Polygon’s lower-cost blockchains. Currently, transaction fees on the POS is less than a penny and users have continued to flock to the side chain.
Finally, layer 2 roll ups have also helped scale the Ethereum network through cheap transaction fees. As their name implies, they bundle transactions together and execute them before sending the updated transaction data back to Ethereum. Put together; the various L2 rollups have a combined TVL of over $5 billion
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What the Future Holds
Scaling came to the fore in 2021. However, transaction throughput needs to increase significantly for the blockchain to become mainstream. According to SBF, the richest man in crypto, blockchain networks need to continue scaling until millions of transactions are processed in a second.
Achieving that pace of scaling will enable the crypto sector to compete effectively with financial payment gateways like Mastercard, Visa and Paypal. It will also signal the global adoption of cryptocurrencies. Therefore, significant effort should be geared towards scaling in 2022.
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