Every blockchain faces a problem when it comes to scalability. As the number of users and transactions increase, blockchains struggle to process them efficiently. Scalability refers to a blockchain’s ability to handle a high volume of transactions at a reasonable speed.
For cryptocurrencies to become mainstream, blockchains must find a way to achieve high scalability. If they fail to do so, they will not be able to process transactions in a timely manner, causing users to reject them in favor of traditional payment methods.
Unfortunately, blockchains have not proven themselves to be adequate in terms of scalability. Bitcoin, the most famous cryptocurrency, is notorious for its slow transaction processing speed, with a scalability limit of only 7 transactions per second. Ethereum doesn’t fare much better, with a rate of 20 transactions per second. In comparison, Visa can process a staggering 24,000 transactions per second, highlighting the significant problem faced by blockchains.
Several factors determine the scalability of blockchains. One major factor is throughput, which measures the number of actions a blockchain can perform within a certain time period. In the case of blockchains, transaction throughput refers to the speed at which they can validate and add transactions.
The structure of the blockchain network itself also affects scalability. Blockchains are decentralized networks composed of numerous individual nodes, and every mined transaction must be broadcasted to all nodes. This process requires significant time and resources, often leading to delays in block confirmation and network congestion.
Capacity is another issue that affects blockchain scalability. Blockchains serve as ledgers that record every transaction ever made, and as the data grows, more storage resources are required by each node. Therefore, scalability is not solely determined by throughput. Even if Bitcoin’s throughput were increased to 1,000 transactions per second, it still wouldn’t scale due to the time it takes to confirm each block.
The “blockchain trilemma” is also worth mentioning. It refers to the fact that blockchains cannot achieve decentralization, security, and scalability simultaneously. The architecture of blockchains necessitates sacrificing one aspect to achieve the other two. Since decentralization and security are crucial to Web3, scalability is typically the sacrificial element.
To address the scalability issue, various scaling solutions have been proposed and implemented. Many of these Layer-2 scaling solutions focus on processing transactions off-chain to reduce network congestion. While they work well for individual users and decentralized applications, implementing them in the crypto trading world, where numerous exchange platforms require high-volume transaction processing at near-instantaneous speeds, is more complex.
To solve the problem of cross-chain asset swapping between exchanges, a more advanced solution is needed. This is where Yellow, a Layer-3 network, comes into play. Yellow has developed a cross-chain and peer-to-peer network overlay that facilitates transactions between multiple parties by pooling liquidity from different networks and participants. It acts as a clearing house for centralized and decentralized exchanges to trade with each other off-chain using state channels.
Yellow’s architecture consists of a Financial Information Exchange, which serves as a relay network for CEXs, DEXs, and other brokers to send messages that facilitate individual transactions. The Electronic Communication Network optimizes buy and sell order matching, while state channels are opened to enable rapid off-chain asset exchange. Participants deposit collateral within the governing smart contract to cover the balance of their planned trades when opening a state channel.
Yellow enables numerous parties to engage in high-volume trading with immediate finality. State channels aid scalability by settling the final balance at the end of a series of transactions off-chain. The system remains secure as the final transaction is recorded on the blockchain. Each individual transaction within a state channel is signed by both parties and settled immediately off-chain, with a smart contract keeping track of the balance. To close a channel, all participants must sign the final transaction before it is verified by the blockchain.
State channels have a unique feature called a “nonce,” which acts as a timestamp. Using the nonces, the smart contract can determine the chronological order of messages sent and settle the state based on the final message signed by all participants. This prevents foul play and ensures that the true balance of all transactions is reflected.
By utilizing state channels as a Layer-3 infrastructure, Yellow Network aims to revolutionize digital asset swaps between crypto exchanges by providing rapid cross-chain interoperability for real-time transactions. The network operates independently of underlying blockchains, allowing for infinite scalability. Yellow has created the necessary infrastructure to make high-frequency cross-chain trading a reality for every exchange, bringing crypto closer to mainstream adoption.
