Scalability has been the Achilles heel of blockchains over the past decade. Bitcoin (BTC-USD), Ethereum (ETH-USD), and most altcoins struggle to sustain adequate throughput. Here's how the most popular blockchains in the world stack up against traditional financial services:
Source: How Much
ETH and BTC cannot hope to surpass Visa (NYSE:V) and PayPal (NASDAQ:PYPL) as global payment alternatives if the throughput is orders of magnitude lower. In fact, the Ethereum network can't even perform its most basic functions when the network gets congested. Back in 2017, Crypto Kitties exploded in popularity, and the app congested the network. At its peak, people were spending millions of dollars' worth of ETH on buying digital kitties, while the app was responsible for 20% of the overall ETH blockchain. This embarrassing ordeal highlighted the biggest challenge in creating a 'world computer' based on the Ethereum network. Similarly, transaction fees and transaction times hit a record high when the price of Bitcoin exploded in late-2017.
The issue seems to be a trade-off between decentralization and throughput. Some blockchain projects like EOS and NEO promise higher throughput with more transactions per second, but these networks have fewer validator nodes. According to this site, the top 100 accounts hold 70% of NEO's total money supply - a far cry from decentralization.
As the crypto prices sputter in the current bear market, a solution for this bottleneck in throughput could act as the catalyst for the next leg up in valuations. The most popular cryptocurrencies could attract a lot more users and developers while supporting more complex Dapps (Decentralized apps) created for mainstream adoption.
Fortunately, a team of Swiss developers and blockchain academics have a created a new protocol that outperforms all other scalability solutions and instantly opens the floodgates to heavier transaction volumes on the blockchain. Known as the Liquidity Network, this solution could allow for hundreds of thousands of transactions on the most popular blockchains within seconds at a fraction of the cost. Here's a closer look:
The Liquidity Network
Created by Arthur Gervais, a blockchain professor at Imperial College, London and Rami Khalil, the inventor of REVIVE, Liquidity.Network is what's known in the industry as an off-chain solution for scalability. According to the team's whitepaper, the solution "allows an arbitrary set of users in a payment channel network to securely rebalance their channels, according to the preferences of the channel owners." Essentially, the network takes some transactions off the main blockchain and squares them off to help speed up completions on the mainnet.
Another characteristic that sets this solution apart from the more well-known scalability projects like Raiden and Lightning.Network is the hub-and-spoke model applied to the liquidity network. This unique hub-based architecture leads to lower fees, significantly lower amounts of collateral needed, easier routing, free and instant channel establishment, and non-custodial off-chain atomic swaps.
Source: Liquidity.network whitepaper
This off-chain settlement system is already online and accessible through the team's digital wallet. It supports ETH and ERC20 token payments at the moment, and the team hopes to deploy a decentralized exchange (NYSE:DEX) on the same model soon. Their upcoming ICO in June should help fund this development.
LN's scalability solution is so elegant that even Ethereum founder Vitalik Buterin acknowledged it as one of the most promising projects for resolving the scalability crisis. Here's his tweet:
Liquidity Network comes across as a promising solution for three of the most crucial problems with blockchain technology. It drastically reduces fees, which makes micropayments and airdrops more efficient. The network improves scalability so that more apps and transactions can occur together, and it eliminates the need to lock up collateral on a payment channel while completing a transaction. The team already has a working minimum viable product on its website in the form of a wallet. They've released a mobile app at EDCON in Toronto which is currently in private beta. The mainnet is expected in June this year, and the DEX could be completed in the third quarter of 2018.
For hodlers and traders who've waited for a solution to these problems since the inception of Bitcoin and Ethereum a few years back, these solutions couldn't come any sooner.
What Does This Mean For Crypto Investors?
The intrinsic valuation of cryptocurrencies like BTC and ETH relies on their network effects. Unlike stocks and bonds, there are no cash flows for holding a coin. Instead, you expect the value of each coin to go up as more people join the network. Network effects are the reason it's so difficult to live in the modern world without a smartphone, or why people struggle to quit Facebook (NASDAQ:FB). For more on this effect, read about Metcalfe's Law or Zipf's Law.
The rise in price of most crypto assets over the past few years corresponds closely to the number of new users. For example, the number of blockchain wallet users across the world rose from 3.2 million in early-2015 to over 24 million by late-2017. Similarly, the number of unique Ethereum addresses rose from less than 1 million in Jan. 2017 to more than 35 million today. Of course, the prices for crypto assets skyrocketed throughout 2017 alongside growing adoption.
Source: Ethereum Unique Address Growth Chart
Scalability solutions like Liquidity Network dissolve the core barrier for most users. If the transactions on popular blockchains can surpass traditional financial institutions for a fraction of the price with unlimited access, it's safe to say more people will join and use the network. This should eventually push prices higher.
With the recent plunge in ETH and BTC and the upcoming scalability solutions this year, it seems like an opportune time to buy and hold some more crypto.
Disclosure: I am/we are long ETH-USD.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.