Sergey Ivliev

Main Sequence of the Blockchain Scalability

Workshop on the Systemic Impact of Digitalization

on Finance, Zurich, December 20, 2019

Perm State University | Lykke

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“For now, virtual currencies such as

Bitcoin pose little or no challenge to

the existing order of fiat currencies

and central banks. Why? Because

they are too volatile, too risky, too

energy intensive, and because the

underlying technologies are not yet

scalable. But many of these

are technological challenges that

could be addressed over time.”

https://www.imf.org/en/News/Articles/

2017/09/28/sp092917-central-banking-

and-fintech-a-brave-new-world

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▪ 3% daily volatility of BTC/USD (57% annualized)

▪ 10x compared to EUR/USD and 5x compared to Gold

https://www.buybitcoinworldwide.com/volatility-index/

Too volatile

Top-5 hacks >$1.2 bln

Recent large hacks:

• Coincheck $534m

• BitGrail $195m

• Coinrail $37m

• Bithumb $30m

Too risky

Too energy intensive

70-80 TWh annual energy consumption, $2-4 bln cost, 35 Mt CO2 footprint

https://www.cbeci.org/

https://digiconomist.net/bitcoin-energy-consumption

~4 tps transaction rate (max 10-12 tps)

53k(2013)

Not (yet) scalable

226k(2016)

https://blockchain.info/charts/n-transactions?timespan=all

285k

3.3 tps(2017)

Max=425k

4.9 tpsWU 9 tps (2016)

SWIFT 130 tps (2016)

Paypal 200 tps (2016)

Visa 4470 tps (2017)

222k

2.6 tps(2018)

329k

3.8 tps(2019)

Scaling strategies

Layer-2 (Vertical):

• Payment channels

• Sidechains

Layer-1 (Horizontal):

• Bigger blocks

• Sharding

• PoS

• DAG

https://explorer.acinq.co

Vertical scaling (Layer-2)

Lightning Network

Vertical scaling (Layer-2)

Advantages:

• The transactions are carried out in milliseconds

• Scalability is up to 1 million per second or more

• Safety is guaranteed by blockchain

• Does not require trust between the participants

• Low transaction costs

• The possibility to carry out micro-transactions (<$1)

Vertical scaling (Layer-2)

Disadvantages:

• Opening and re-opening channels requires transaction costs

• The average amount of collateral in the channels is small ($20),

payments over $5 can be a problem

• The hub needs to keep the frozen capital in the channels

https://www.trustnodes.com/2019/08/20/guy-makes-20-a-month-

for-locking-5-million-worth-of-bitcoin-on-the-lightning-network

• Lykke stats (Dec’17): 6200 channels, $8 mln frozen in the channels,

$400k in fees to close the channels

Vertical scaling (Layer-2)

https://bitcoinvisuals.com/lightning

Lightning network: <$7 mln capacity

Scaling strategies

Layer-1 (Horizontal):

• Big blocks: e.g. Bitcoin Cash, Bitcoin SV

• Sharding: e.g. Zilliqa, NEAR, Polkadot

• PoS committee: e.g. Algorand, Ethereum 2.0

• DAG: e.g. Hashgraph, Perlin

Important Metrics

Throughput:

• peak tps

• finality

Decentralization:

• # of independent writing nodes

• # of full listening nodes

Security:

• attack surface

• cost of attack

Throughput Decentralization

Security

Topology

Centralized Federated Decentralized

1 101-102 102-104

Ripple, Stellar, EOS; Corda; Libra Bitcoin, Ethereum, LitecoinVISA, PayPal, WeChat Pay

103-105 tps 102-103 tps 101-102 tps

Byzantine Agreement / BFT / DPoS PoW Nakamoto

Scalability Sequence

PoW Nakamoto

Federated / BA

(Dec 2019)

Scaling by nodes (decentralization)

Scaling by

transactions (throughput)

Collusion

https://btc.com/stats/pool?pool_mode=month

Mining concentration

https://etherscan.io/stat/miner?blocktype=blocks

Bitcoin Ethereum

Wealth concentration

https://news.earn.com/quantifying-decentralization-e39db233c28e

Root cause

• Proof-of-Work and Proof-of-

Stake are based on capital =>

Pareto distribution

• Larger players enjoy economy

of scale and adopt anti-

competitive practices/collusion

• Smaller players vanish, the rich

get richer

Proof-of-Person

• Human-centric blockchain

• Proof-of-Person consensus

• Collective AI-resistant Turing test

• 1-person-1-vote / unique-human

• Use cases: DAO governance,

decentralized oracles, prediction

markets, p2p economies

Proof-of-Person

• “Flip Challenge” Turing test

• Time-synchronized

• Common sense based

• Human accuracy ~95.6%

• AI accuracy <70%

• Prize for AI teams to break 80%

https://idena.io/?view=flip_challenge

• Bitcoin is a great experiment for p2p

global censorship resistant internet

money, but it is not scalable

• Trade-off between scalability and

decentralization

• Inherent centralization in permissionless

systems

• New generation of protocols is coming

to ensure both decentralization and

throughput

Summary

Perm Winter School 2020

People and money in the

digital era

1-2 Feb 2020

permwinterschool.ru