The necessary scalability of Layer-1 on the blockchain

This post originally appeared on ZeMing M. Gao’s website, and we republished with permission from the author. Read the full piece here.

Blockchain has opened up many possible applications, including payments, tokenization, smart contracts, and general data access management. For beginners, a recent article The Crypto Story, written by Matt Levine at Bloomberg, is a good read. It explains quite well in non-technical language some of the problems blockchain could potentially solve, as well as the problems it currently has. In particular, the article makes a good common sense case for the need for a new type of database to replace the existing ones, something the current crypto world largely lacks.

But it’s not a “crypto story.” It’s a blockchain or distributed ledger story, as “crypto” is a mischaracterization as well as a misleading movement, and some of the DeFi applications are dubious, or at least we haven’t figured out the real use cases yet.

The world needs a new data paradigm, and this goes far beyond payments, tokenization and smart contracts as they are understood today. The new computing paradigm will be based on a new internet that integrates IPv6 and blockchain. It will fundamentally change how data is managed today, and that includes not only every database that exists in the world, but also general access rights for Internet data, whether it is value-related or security and privacy-related.

The current block chains are not cut for this job

If you really think about these applications seriously, you will realize that eventually it will need a blockchain that has unlimited scalability, as well as extremely low transaction costs at a small fraction of a cent.

This immediately exposes almost all existing blockchains to be incompetent for wide adoptions.

And Layer 2 (L2) solutions will not solve the problem. See L2 solutions and more about L2 solutions.

Because L2 solutions have no settlement capability, every transaction that needs immediate settlement must be settled at Layer 1 (L1). This requires L1 itself to be sufficiently scalable in real-world use, even with useful L2 solutions available for appropriate applications.

The core issue is that to have full blockchain capabilities (micropayments, smart contracts, tokenization and decentralized data), even with a powerful L2 solution, you still need a scalable Layer 1 (L1) blockchain to be able to run a large number of transactions on the chain including settlements and verifications.

How scalable does it need to be? The short answer is “unlimited” – Millions or even billions of transactions per second (TPS), instead of the usual 5-7 TPS (BTC), 20 TPS (Ethereum), or thousands as touted by some other blockchains that claim to have solved the problem problem of scalability.

Becoming a global solution for Internet transactions that includes not only payments but also all kinds of smart contracts, tokenization and data access/rights transactions means being scalable L1 transactions per second (TPS) well over hundreds of thousands now, millions in the near future and even billions in the long run, and L2 TPS another thousands of times of L1 TPS.

To understand this, let’s take a look from the whole Internet point of view.

According to a recent estimate, the world’s global Internet traffic is about one petabit per second (1×10^15 bits/s). This estimate seems reasonable compared to a 2011 article Science Journal estimated the communication capacity of the Internet at 3 x 10^12 kb/s. See: The world’s technological capacity to store, communicate and compute information (science.org). A 300-fold increase in 11 years equates to annual growth of approximately 55% on average over the past decade. With the explosive growth of the Internet of Things (IoT), the future growth of Internet capacity could easily surpass that of the last decade.

Following this trend, global Internet traffic will be the least 1×10^17 bits per second in 10 years.

Assuming the following conditions:

• an average transaction size of 1 kb/tx (for reference, the size of a single Bitcoin transaction is 0.25 kb/tx),
• only 1/1000 of the Internet capacity needs to be transacted blockchain (including not only a value transaction layer or Internet of Value – IoV, but all database-related transactions for security and authorization purposes), then the blockchain transaction capacity is needed to support such a future will be:

Now: 10^9 txs/s (1 billion TPS), on L1 and L2,

In 10 years: 10^11 txs/s (100 billion TPS) , on L1 and L2, and

In 20 years: 10^13 txs/s (10 trillion TPS), on L1 and L2.

And if we further assume that only 1/1000 of blockchain transactions (or 1/1,000,000 of the Internet) will be settled at Layer 1, the L1 blockchain transaction capability needed to support such a future would be:

Now: 10^6 txs/s (1 million TPS), L1 only,

In 10 years: 10^8 txs/s (100 million TPS), L1 only, and

In 20 years: 10^10 txs/s (10 billion TPS), L1 only.

Therefore, to function as a data and value transaction layer in the future Internet, the blockchain network will need to have L1 transaction capacity of TPS in the billions in just two decades.

And in the above assume only 1/1000 (one thousandth) of the Internet on blockchain, and 1/1,000,000 (1 millionth) on L1.

In more practical terms, it is very conservative to say that a full-fledged blockchain that supports blockchain databases, Web3 and LoT must have L1 TPS in the hundreds of thousands and L2 TPS in the hundreds of millions now and continue to grow without limit.

This is the type of scale for the future on-chain database, Web3 and IoV supported by blockchain. People who think that max TPS of a few thousand is going to be sufficient are simply out of touch with the scale of reality. It’s one thing to get rid of a few multiples, but quite another to get rid of thousands or even a million times.

The notion that one can push almost all transactions to L2, in the hope that an L1 blockchain limited to a TPS of 5-7 transactions can serve as the settlement layer for the entire world, is not even serious enough to be entertained. BTC, as an L1 blockchain, will never could do it. Limited to 5-7 TPS by design, BTC is short by many orders of magnitude, so it’s a dead end for whatever L2 solutions there might be.

Other blockchains will also have to reconsider the issue of scalability in light of the new Internet that integrates IPv6 and blockchain.

But there will be many blockchains to share the distributed scaling burden, right?

This is another prevailing falsehood. The current state of hundreds of blockchains is not a sign of healthy development, but quite the opposite. It is a bad result of an unfortunate development started from the early years of the Bitcoin blockchain. See: The Real Bitcoin and the Blockchain; and The Great Diversion which led the entire field in the wrong direction.

To truly evolve into a productive and useful system, blockchain must converge at the base layer, while allowing unlimited applications on top of the base layer. The Internet is an analogy. The Internet is built on the TCP/IP protocol, which allows both robust infrastructures and unlimited applications.

Even the universe is created based on the principle that the law is set with absolute stable unity, while existence based on the law has unlimited variation. The unlimited variation is possible because of, not in spite of, the stable unity of the law.

With the upcoming integration of the Internet and blockchain based on IPv6 and CGA (cryptographically generated addresses) to form a unified IoV, there can only be one blockchain at the base layer. And that blockchain must have extreme scalability and low costs, on the order of TPS in the billions and cost per transaction a thousandth of a cent. Other blockchains will either die, or if they have a good enough reason to continue to exist in the market, they will be absorbed into the unified IoV and become overlay networks, enjoying the efficiency of the base layer blockchain while maintaining a market niche.

See more: One blockchain as the base layer of IoV.

Scalability overall

Some might argue, if my application doesn’t need more than one transaction per second, why should I care about a blockchain that can reach millions of transactions per second?

The answer is very simple: the scalability of a system is always an issue Collectively. A blockchain that can meet the needs of a few applications but not everyone will eventually fail and be eliminated from the economy.

A completely different type of problem arises when L1 and L2 are implemented to solve real-world problems. Scalability must be considered Collectively (versus each application being assessed separately).

Together, both L1 and L2 must be scalable, each in its own area. This is the case even if the so-called L2 application has already made a conscious sacrifice of not enjoying the benefit of the blockchain for its transactions except for occasional settlements, as in the case of the most current L2 solutions. Such solutions are a dead end without a scalable L1 in the first place, because a blockchain that cannot scale collected with all applications built on the chain are not going to be adopted by the market in the end, regardless of whether a particular application needs such L1 scale or not.

See: The presentation of the BSV Global Blockchain Convention, BSV Blockchain: A World of Good

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