There still needs to be a lot of development and scaling work done in order for Ethereum and other cryptocurrencies such as Bitcoin to overtake existing financial systems, explained Ethereum co-founder Vitalik Buterin in an interview with prominent venture capital investor Naval Ravikant at the Disrupt SF 2017 conference hosted by TechCrunch.
Before delving into the scalability issues of Bitcoin and Ethereum, it is important to acknowledge that scaling decentralized Blockchain networks is far more difficult than expanding centralized systems. With permissioned or closed networks like Visa and PayPal, it is relatively easy and less expensive to become more flexible and serve billions of users.
But, Bitcoin and Ethereum focus on security and prioritize decentralization by operating on top of the Blockchain, a transparent ledger which processes and facilitates the transfer of data.
Scaling solutions that have been integrated into Bitcoin and Ethereum and alternative technologies which are currently being developed by the open-source development communities of the two Blockchain networks are unprecedented. With the development of on-chain, off-chain and two-layer solutions, developers are attempting to optimize the way the Blockchain networks process transactions and smart contracts.
The development of scaling solutions itself is already difficult but reaching consensus amongst developers, miners, users, businesses and node operators is also a real challenge. For instance, it took the Bitcoin community and industry over a year to implement the Bitcoin Core development team’s Segregated Witness (SegWit), which so far has demonstrated successful scaling of the Bitcoin network.
As Buterin explained:
“Bitcoin is currently processing a bit less than three transactions per second and if it goes close to four, it is already at peak capacity. Ethereum has been doing five per second and if it goes above six, then it is also at peak capacity. On the other hand, Uber on average does 12 rides per second, PayPal several hundred, Visa several thousand, major stock exchanges tens of thousands, and in IoT, you’re talking hundreds of thousands per second.”
For Bitcoin and Ethereum to surpass Visa, PayPal and stock exchanges in terms of processing volume and scalability, developers must come up with innovative, efficient and robust scaling solutions. If Ethereum and Bitcoin evolve into multi-trillion dollar financial and Blockchain networks, the current framework and scaling solutions will not be sufficient.
Both Bitcoin and Ethereum are targeting the development of on-chain and off-chain solutions. Famously, Coinbase co-founder Fred Ehrsam noted in an analytical blog post that the Ethereum network must improve by a factor of 100-fold in regards to scalability just to serve decentralized applications with millions of users.
“There already is really a lot of institutional hype in the space and just public hype. So when you have Vladimir Putin having known what Blockchains and Ethereum are and Paris Hilton going out promoting ICOs on Twitter, that’s peak hype. But the reason why a lot of this hasn’t materialized into action yet is precisely because of some of these technical obstacles that make Blockchains work okay for niche use cases but not really for work well for mainstream use,” explained Buterin.
He further emphasized that the Ethereum Foundation and developers in the open-source community are working very hard to introduce scalability solutions. Plasma, sharding and Metropolis are only a few of scaling solutions that Ethereum developers are actively testing and trying to implement.
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