After the housing market collapse in 2008, the first cryptocurrency, Bitcoin, was created as a response to the corruption and greediness of the traditional banking system. With its distributed ledger, Blockchain technology offers fast, cheap, and secure transactions without any central entity.
However, as crypto began gaining momentum, its community and transaction volume have grown drastically. For instance, Bitcoin’s daily volume currently exceeds $30 billion. While offering significant development advantages, mass adoption also has its challenges. Scalability, for one — the more participants, the more network load, the more difficult for the system to process all transactions. As a result, they become more expensive and slow.
One of the ways to solve the scalability problem is sharding, the process of splitting a blockchain into several layers to ease the network load. This article explores the benefits of the technology, as well as its limitations and risks.
What are Layer-1 blockchains?
Layer 1 is a protocol that processes and finalizes transactions on its blockchain. In simple terms, such blockchains are self-sustainable and don’t require additional networks. Layer-1 systems offer many advantages, the most important being security. Since the copy of the distributed ledger is stored on each network’s node, such blockchains are better protected against a 51% attack. Layer-1 protocols include Bitcoin, Ethereum, Binance Smart Chain, Solana, etc.
Scalability problem of Proof-of-Work (PoW)
As we have already mentioned, the main problem of base blockchains is scalability. Take Bitcoin: when the network load increases, the transaction time and fees tend to skyrocket. Until recently, the same was true for Ethereum — sometimes commissions surpassed the transaction size.
The main reason lies in the consensus algorithm. Bitcoin is built on the Proof-of-Work mechanism, which requires large computational power to add new blocks to the ledger. If the number of transactions is too high, the network processes them more slowly and increases fees. In crypto, such a phenomenon is called blockchain trilemma, a belief that a system must sacrifice either security, decentralization, or scalability.
What are the solutions?
There are three main approaches to take:
- Increasing the block size
For example, Bitcoin has a block size of 1 MB, which allows the processing of four transactions per second. To solve this issue, a Bitcoin Cash fork took place. The block size for a new cryptocurrency increased to 8 MB, making the network much faster than BTC.
- Changing the consensus algorithm
Another way would be to switch from Proof-of-Work to another, more efficient consensus algorithm — Proof-of-Stake. Since it doesn’t rely on computational power, the system may be able to process thousands of transactions per second. However, the technical process is incredibly time-consuming and complex. It took years before Ethereum finally migrated to PoS a week ago.
- Sharding
Sharding is the easiest way to deal with Layer-1 scalability challenges. It refers to the process of splitting a blockchain into separate ‘shards’ to improve transaction output.
Sharding: benefits for Layer-1
| Spread network load | Separate structure | Better accessibility |
| The workload will be spread between different shards, allowing for better transaction speed. | Each shard manages a subset of the network’s activity — its transactions, nodes, and separate blocks. | Sharding can be used to lower the hardware requirements to participate in the network, expanding the project’s reach. |
Many prevalent cryptocurrencies use sharding to improve scalability. Harmony’s mainnet, for instance, operates on four shards, each creating and verifying new blocks in parallel. Moreover, a shard can have its block height (speed). Another example is Elrond: the blockchain utilizes Adaptive State Sharding that allows for parallel processing.
Security concerns
Since sharding does not require each node to store a copy of the distributed ledger. It makes such a blockchain more susceptible to hacker attacks. Moreover, there is a corruptions concern that one shard can take over the other, leading to the loss of information or data.
Is it possible to improve scalability without sharding?
Yes, through Layer-2 solutions. Instead of splitting a blockchain into separate shards with their responsibilities, such solutions are a secondary framework or a protocol built over a base blockchain. For example, the most famous Bitcoin Layer-2 solution is the Lightning Network. Simply put, it allows users to transact directly with each other without adding data to the blockchain. Thus, two problems are solved at once: faster and cheaper transactions and reducing the amount of blockchain data. However, Layer-2 projects have the highest risk degree regarding security and hacks, so please keep that in mind.
Is there a perfect solution?
Not yet, but current projects are testing all sorts of roll-ups and consensus mechanism variations to solve the blockchain trilemma. The crypto market is only developing, meaning that many technical challenges are yet to be overcome with the mass adoption and integration taking off. In this regard, it is vital to know the benefits and risks of each blockchain type to make an informed decision based on your personal goals.