Before addressing the problem itself, we need to understand what scalability really is about.
As much as it is a word that is part of the daily life of those who are inserted in the crypto market, “scalability” is not such a common word for other people.
Scalability refers to the extent to which a technology or service is able to reach as many users as desired, maintaining the quality of the service.
A practical example of scalable technology today: the internet.
Today, 3.9 billion people worldwide have access to the internet. In Brazil, about 70% of the population has access to the web. Multiple people can have access to the internet in the same country, city, building or even in the same house, without it significantly losing quality, or becoming more expensive for this.
An identical example of non-scalable technology is the Internet itself. But not today: in the early 2000s.
Who remembers dial-up internet ?! Depending on the time, using the internet was cheaper - at dawn, if you want to know. At other times, it was more expensive.
If more than one person connected to a network simultaneously, the chances of it becoming unstable, or even falling, were very high.
"But why do I need to know about scalability?"
If you are inserted in the crypto market in any way, or are looking to enter our market, it is essential that you know that scalability is one of the pillars for networks. And for most of them, it is the most fragile pillar.
We recently talked about Ethereum in our article, and this platform is one of those that suffers the most from the lack of scalability. In terms of processing capacity itself, Ethereum is able to supply demand well. There is no lack of computational power.
However, the “price” of the chain ends up rising.
Each transaction or action of any kind on the Ethereum network costs an ETH fee.
This goes for sending ether, ERC-20 tokens (tokens created at Ethereum) or even executing a smart-contract (scheduled and self-executing contract). Check out our practical guide to understand about Ethereum portfolio .
The fees are used to reward miners. They are the reward for providing computing power to the network and keeping it alive and functional.
The greater the number of transactions and executions of smart-contracts, for a stable number of miners, the greater the average rate per transaction tends to be. And since the number of miners does not increase in proportion to the number of transactions, scalability is at stake.
Ethereum's lack of scalability
The first major occurrence that opened up Ethereum's lack of scalability occurred on December 4, 2017, with the emergence of CryptoKitties, a game of virtual cats in which you can buy, trade and collect digital animals.
An application that, at first glance, is unsophisticated, but which nevertheless generated a great demand on the Ethereum network. There were a lot of people playing at the same time and this created a stress on the network.
The average rate, which was 0.000684 ETH or $ 0.31, came to 0.0172 ETH ($ 8.03).
It is important to note that we are talking about the average rate. Therefore, there were negotiations with rates higher than this amount.
The main problem that lies with the high fees is the price paid for small transactions on the network, which in some cases becomes similar to the value of the transaction.
It's like buying a $ 50 product and paying $ 45 for shipping or delivery charges. Consumers have no appetite for a rate as expensive as the product itself. And in the case of ether, or any other crypto, they should have even less appetite.
And knowing this is essential, as, as I write this text, Ethereum's average rate has reached its historic high, at 0.02 ETH. In dollars, the price is still lower than at the time of Cryptokitties if looked at in dollars (approximately $ 7.52), but the most accurate metric is in ETH and, in this case, we are at the historic maximum.
But what led to the current high rates?
Again, it was the high utilization of decentralized applications created at Ethereum. More specifically, through decentralized finance applications (DeFi).
These applications are the most discussed and appreciated part of the crypto universe at the moment. In a quick summary, these are applications that use the agility, transparency and automation of processes without intermediaries from Ethereum's blockchain, to provide common financial services of the traditional market, but using crypto.
The most common example is lending platforms, where you can play both the role of a bank and lend crypto at an interest rate per term; or, as is more usual in the traditional market, as a borrower.
This is just one of several examples of DeFi applications, but it is safe to say that it is the DeFi segment that generates the most trading volume within Ethereum.
As we can see, of the 11 largest volumes of Dapps traded, traded on Ethereum, nine are from decentralized finance. Despite providing a very interesting service, which may even be called revolutionary, for the crypto market, Ethereum still has difficulties in supporting a high volume of transactions and executions of smart contracts.
This further increases anxiety about the so famous - and equally delayed - update of Ethereum: Ethereum 2.0.
One of the main problems addressed by the next major update to Ethereum is scalability itself, by changing the consensus mechanism from Proof of Work (PoW) to Proof of Stake (PoS).
This mechanism is, in theory, more scalable and, in the long run, promises to solve the problem of Ethereum's lack of scalability. Consequently, the increase in rates in periods of high demand from the network.
