Ethereum and Smart Contract Scaling


            The cryptocurrency scaling debate continues with Ethereum remaining a viable contender after the recent deployment of the Raiden testnet and the upcoming Metropolis hardfork in spite of problems earlier this year with a clogged network caused by the popularity of the ICO's hosted on the Ethereum network. As the first popular platform for smart contracts these troubles highlight the ability for networks to scale as one of the important hurdles to mainsteam adoption faced by cryptocurrencies. To better understand the scaling debate we have to understand the different functions that cryptocurrencies can serve and why scaling plays such an important role in carrying out those functions.


Why Do Cryptocurrencies Need To Scale?
            Bitcoin has existed long enough for most people to assume that it serves some kind of important function, whether they understand it or not, and if Bitcoin and cryptocurrency has been important enough to have been around this long then people will eventually want to understand that function and how they might be able to use that function for their own purposes. At this point, the ability to use Bitcoin becomes less important than the ability to replicate Bitcoin and create your own cryptocurrency used for your own unique purpose.

            Cryptocurrencies that exist today can be put into one of three categories based on their value to users: transactional, speculative, and developmental. Tokens like Tether and Steem Dollars with mechanisms that suppress volatility and attempt to maintain a consistent spot price have transactional value because users do not generally buy them thinking they will go up in value; they buy them because they provide useful, specific ways to exchange digital currencies. For example, high volatility in cryptocurrency markets often results in a lot of money flowing towards Tether and Steem Dollars until the craziness subsides because it's  faster and easier to transfer cryptocurrencies into other cryptocurrencies than cryptocurrencies into fiat currency.

            Bitcoin and probably the vast majority of tokens could be described as speculative. Individuals may use these tokens for transactions but they generally purchase speculative assets because they represent something useful that the buyer expects to gain in value over time. From this perspective, even the decision to continue holding dollars or whatever your native fiat currency may be over digital currencies amounts to a speculative decision. Do you believe that Bitcoin will gain more value than dollars over the next year? If so, then why continue to hold dollars for speculative reasons? The logical thing to do would be to hold enough dollars for day-to-day transactions and convert the rest.

            The final category of cryptocurrencies includes Ethereum, NEO, and other digital assets that act as platforms for the development of smart contracts, hence the name “developmental.” These tokens differ from the others by acting as platforms for the creation of other tokens. Smart contracts act just like legal contracts but instead of being enforced by lawyers and judges they do whatever their coding tells them to, allowing people to create digital assets backed by any form of value imaginable.

Why Is Scaling A Problem?
            It makes sense for there to be multiple digital assets to serve transactional or speculative functions because they can serve different forms of value but the world does not need more than one good platform for smart contracts. Different smart contract platforms do not (currently, at least) serve different functions or create different kinds of value like transactional or speculative tokens. Scaling represents one of several major hurdles that smart contract platforms have to overcome before the community decides which platform will do the best job of accommodating transactional and speculative currencies.

            The limitations facing speculative and transactional assets become tiny when you consider the amount of transactions handled by a developmental asset and while Ethereum has been considered the most viable platform so far the issue has been far from settled. For cryptocurrencies to become a viable alternative to Visa or Paypal in terms of payment processing their developers have to consider the number of transactions per second the network can handle. It may be possible to move digital assets across the globe at lightning speed right now but once those networks start handling the same volume as networks like Visa or Paypal the wait times for transaction settlement could be significantly longer.
            According to Fred Ehrsam, the Ethereum network can process about seven transactions per second as of June 27, 2017 compared with Facebook going through 175,000 requests per second or Visa at 24,000  transactions per second. Ethereum may not have as many users as Visa or Facebook yet but it must find a way to adapt if it wants to have a chance at reaching that level of adoption.

Ethereum's Approach
            Ethereum inventor Vitalik Buterin has blamed some of Ethereum's scaling problems on inefficiently-written smart contracts but has admitted that the larger picture will require an upgrade of the entire system. The next version of Ethereum will be called Ethereum Metropolis and it has been scheduled for implementation in September 2017. Metropolis will include important new functions for developers and security upgrades and has received a lot of attention from the cryptocurrency community but a lesser-known upgrade called Raiden will address the scaling situation specifically.

            Raiden consists of a payment channel that will be Ethereum's answer to the Lightning Network deployed on Litecoin and Bitcoin. The Raiden testnet recently deployed on September 5, 2017 and while the testnet should not be confused with the final version it will help work out the kinks as one of the final critical steps before its release. Ethereum developers have claimed that the Raiden upgrade will allow the network to process over a million transactions a second, leaving Facebook and Visa in the dust.



Competitive Scaling
            Ethereum may have been the first and most successful platform for smart contracts thusfar but a number of serious competitors have entered the field. Other projects experimenting with smart contract platforms include NEO, the platform famously backed by the Chinese government, IOTA, a company with a blockless distributed ledger, and Rchain, a Seattle-based company focused specifically on creating a scalable smart contract platform. Just because there does not need to be more than one final platform for smart contracts doesn't mean that will be the case; different platforms will likely come to serve various regions or jurisdictions but the political differences between those organizations will likely be greater than the differences in their smart contract technology.

            Another group to consider includes the individuals who refer to themselves as Bitcoin maximalists. These individuals believe that scaling technologies and all of the other important features being developed on other digital assets like Ethereum will be absorbed by Bitcoin and that Bitcoin's popularity will allow it to be “the one blockchain to rule them all.”

            Although Ethereum has been the clear standout among smart contract platforms to date, no single platform has yet proven itself in terms of being able to scale the network to accommodate a large enough population. Even if multiple smart contract platforms manage to scale, the one that does the best job of accommodating the most digital assets will likely outlive the other platforms as the niche begins to disappear.

Sources
http://www.zerohedge.com/news/2017-06-21/ethereum-flash-crashes-after-status-ico-clogs-network

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