Scaling cryptocurrencies

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During the last financial crisis, Bitcoin appeared. It was a form of electronic cash, but without a centralized bank issuing it. Ten years have passed since then and there are now over a thousand projects in the blockchain space. Some want to decentralize the IT infrastructure or supply chain management, but a lot of them want to provide a new way for people to pay or be paid.

But decentralization comes with a performance cost. Bitcoin could only do 3-7 tps(transactions per second) in the beginning. This is nothing compared to VISA’s 24000 tps capability. It is clear that Bitcoin can’t become a worldwide currency with this capacity. At the end of 2017, when the price was increasing and a lot of new users came, the transaction fees spiked from below a cent to tens of dollars. Can the  cryptocurrencies scale to disrupt the old financial industry?

Scaling decentralized applications is not easy, but there are solutions. Some of them can even make it faster than what we have today.

Smaller transactions. Bitcoin has a block with a max size of 1MB. A solution is clearly to make the transactions smaller. Bulletproofs reduce Monero’s transactions sizes by more than 90%. And there are other improvements currently in development.

Bigger block size. Bitcoin Cash is a fork of Bitcoin with its main feature that it has 32MB block sizes. Increasing the block sizes has costs.

Faster generation of blocks. Reducing the difficulty of producing blocks would increase the network speed, but has its downsides.

Side chainsLiquid is an example. It is made for exchanges where they can transact more fastly without recording their transactions on the blockchain.

Tangle instead of a blockchain. Some currencies use a different method to store their transactions, DAG(directed acyclic graph).

Layer 2, State channels. Lightning network is a layer 2 solution, which is in beta for Bitcoin. I can open a channel with a friend, and we can make a million transactions a day if we want. These transactions are not recorded on the blockchain. When we close the channel, the final balances are sent to the bitcoin blockchain. The only limit is the network bandwidth. Litecoin is also implementing this solution, and this will enable cross-chain swapping and developments of decentralized exchanges.

These are the most promising and debated solutions to bringing a better financial system to the entire world.

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