The blockchain market readies itself to reach a high of $ 394.60 billion by 2028, and there’s no sign of the growth graph receding any time soon. Blockchain technology now caters to large enterprises, investors, and even governments. Despite the bright prospects, the current league of blockchains faces a slew of challenges of which scalability is a particularly significant issue. Unsurprisingly, the blockchain community is witnessing what it already knew would happen, i.e., the original design of the blockchain makes it unsuitable for mass use.   

In Ethereum, especially, the scalability issue is much more pronounced than in other blockchains. This is because the network currently hosts a vast majority of dApps and other platforms. With the number of people using the network reaching abnormally high, the network has reached certain capacity limitations and suffers from congestion, low transaction throughput, and high gas fees. The gas prices on Ethereum have increased 30-50 times during peak times.  

Many new blockchains that have come up have failed to tackle the scalability issue or have achieved success only on paper. As for Ethereum, the team is researching, testing, and implementing various scaling ‘solutions’ to achieve the scalability goals – improved transaction speed and throughput without compromising on the decentralization and security of the network.

We have layer-2 blockchains that help scale applications by handling transactions off the Ethereum Mainnet while using Mainnet’s robust decentralized security model. Ethereum allows asset transfer on L2 rollups, which are primarily off-chain transaction aggregators inside an Ethereum smart contract. The popular belief says that these L2 solutions can bring Ethereum’s TPS to 2,000-4,000 per second, at par with Visa’s processing ability. But the current L2 integrations via dApps and quasidApps require the users to fully entrust the dApp, which is a great risk to the security. To be ideal scaling solutions, the L2 protocols should be built into the wallet so that Ethereum’s current trust model can be kept as it is and the cross-chain transfer of assets between these L2 solutions needs considerable work. 

There’s no ultimate solution to the scalability problem currently, and any new solution would add to the complexity and friction on the network. However, with the Ethereum 2.0 upgrade slated to release in 2022, it seems there’s light at the end of the tunnel. The ETH team has come up with an Ethereum roadmap where:

• The first phase will consist of off-chain solutions such as roll-ups, state channels, sidechains, or plasma chains as a scaling strategy for the near and mid-term future.

• The Ethereum 2.0 Merge (formerly known as docking) will be a requiem between the two phases where Ethereum will move from the current PoW consensus mechanism to the better and more efficient PoS consensus mechanism. 

• And finally, the 2nd phase will consist of on-chain scaling solutions with sharding as the main focus for the long-term future of ETH2.  

Let’s have a quick overview of each of these phases to get an idea of what Ethereum is doing to solve the scalability issue. 

Off-chain Scaling Solutions in the Short Term

The off-chain scaling solutions are deployed separately from the L1 mainnet and require no changes to the existing ETH protocol. They consist of rollups, plasma, side chains, and state channels. These L2 scaling solutions derive their security directly from the Ethereum consensus. 

• Rollups execute the transactions outside layer-1. Once the consensus is reached, the data is posted to layer one, which allows these rollups to be secured by native Ethereum security. 
• State channels employ multi-signature contracts to allow participants to transact quickly and freely off-chain. The transactions are settled with finality with Mainnet to reduce congestion, fees, and latency. 
• Sidechains are EVM-compatible blockchains running in parallel to Mainnnet. They use two-way bridges to communicate with Ethereum and run under their own consensus rules. 
• A plasma is a distinct blockchain anchored to the Main Ethereum chain. 

To make Ethereum1 more compatible for Rollups, Ethereum’s base layer scaling would focus on scaling how much data each block can hold as the prerequisite for ensuring the scalability of a rollup. Any increase beyond ~60kb/s will help to increase scalability for rollups. Multiple scaling solutions help to reduce overall congestion, work in harmony for exponential effect, and eliminate the risk of a single point of failure.  

Ethereum 2.0 Merge

The Merge marks the end of the ETH1 era of PoW consensus while the network transitions to the PoS consensus mechanism post the ETH2 upgrade. Under ETH2 Merge, the Ethereum Mainnet will merge with the Beacon chain proof-of-stake system running parallel to the ETH Mainnet, which continues to be secured by the Proof-of-Work consensus. The Merge will happen when these two systems come together to achieve Etheremu’s vision of more scalability, security, and sustainability. 

On-chain Solutions in the Long-term

On-chain scaling solutions require changes to the Ethereum Mainnet. Sharding is the main focus of these L1 scaling solutions. Sharding is the process whereby a database is split horizontally to split the load. For Ethereum, sharding will involve the creation of new chains known as shards to lighten the load for each validator. The validator will not be required to process all the transactions in their entirety once sharding is implemented on the Mainnet. This deployment will ease the congestion to increase transactions per second on the Ethereum Mainnet. 

A section of the blockchain community is betting on the multichain ecosystem as the panacea for ETH’s scalability issues. But there’s still a dearth of effective cross-chain solutions that can provide much-needed interoperability. That means these blockchains need interoperability to function as a singular ecosystem to boost user experience, improve efficiency, or allow for wider adoption.  

With Ethereum 2’s functionality boosted by L1 and L2 scaling on-chain and off-chain scaling solutions, Ethereum might finally win the scalability war. Though it might be years before we actually get to witness that, and in all probabilities, we might get accustomed to the roll-ups even before ETH2 readies itself to accommodate ‘traditional’ layer1 applications.  

Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.