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Block Size and Scalability, Explained

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Scaling solutions come in two forms: on-chain and off-chain. Both come with pros and cons, but as of now, there is no agreement as to which is more promising for future growth.

On-chain scaling

On-chain scaling refers to the philosophy of changing something about the blockchain itself to make it faster. For example, one approach to scaling includes shrinking the amount of data used in each transaction so that more transactions fit into a block. This is akin to what Bitcoin achieved with its Segregated Witness update, otherwise known as SegWit. By altering how the transaction data is handled, this patch to Bitcoin allowed a notable improvement to overall network capacity.

Another way to potentially boost the TPS of a network is to increase the rate of block generation. While this can be helpful up to a point, there are limitations to this method relating to the time it takes to propagate a new block through the network. Basically, you don’t want new blocks being created before the previous block was communicated to all (or virtually all) of the nodes on the network, as it can cause issues with consensus.

Creating seamless communication between discrete blockchains is another potential way that these systems could scale. If different chains can all transact between each other, then each individual network doesn’t have to handle as much data and the throughput of each should improve. Of course, a system would be needed to ensure the data being sent between networks is 100% accurate, and this is what projects such as Polkadot are working to do right now. By combining multiple native chains as well as smart contracts, this platform makes it possible for the entire decentralized ecosystem to scale together, once fully implemented.

Then there’s a technique called sharding, in which transactions are broken up into “shards,” and different nodes only confirm certain shards, effectively performing parallel processing to speed up the system. This can be applied to proof-of-work or proof-of-stake systems and is going to form a major component of Ethereum 2.0. This offers the potential to improve the capacity and speed of the network, and developers are hoping that we will see upward of 100,000 TPS become a reality. 

On the other hand, it should be noted that it will still take a few years before the sharding process is fully implemented into Ethereum, and detractors have pointed out that it also adds complexity and hurts security. This is due to the fact that sharding increases the chances of a “double-spend” occurring as a result of an attack. The issue here is that it takes notably fewer resources to take over individual shards than it does to perform a traditional 51% attack. This can lead to transactions being confirmed that would otherwise be seen as invalid, such as the same Ether (ETH) being sent to two different addresses.

Some projects have attempted to improve network speeds by limiting the amount of validating nodes — a very different philosophy from Ethereum’s. One example is EOS, which has limited its validators to just 21. These 21 validators are then voted on by token holders in an attempt to keep a fair, distributed form of governance — with mixed results. This has given the network a reported 4,000 TPS, and developers are confident that they can continue to scale, which has positioned the project as one of Ethereum’s main competitors in this space. However, limited validators are often looked down upon as a form of centralization, so not all users are sold on the model.

Of course, one of the most frequently discussed means to scale a blockchain is to increase the size of individual blocks. This was the approach that Bitcoin Cash famously took when it forked away from Bitcoin in 2017. Not wanting a limit of 1 MB, the Bitcoin Cash community changed the rules so that the project could have 8 MB, and later 32 MB, blocks. While this certainly means there is more room in each block for added transaction data, some point out that it is infeasible to continue growing block sizes indefinitely. Many consider this solution to be merely pushing the problem down the road, and at worst, they see it as again primed for harming the decentralized nature of the blockchain. Given that, in practice, the average block on the Bitcoin Cash network is still under 1 MB, the debate on this is as of yet unsettled, and we will explore the issue more thoroughly below.

Off-chain scaling

There are also ways to improve network throughput that don’t directly change anything about the blockchain. These are often called “second-layer solutions,” as they sit “on top of” the blockchain. One of the most well known of these projects is the Lightning Network for Bitcoin. Basically, Lightning Network nodes can open up “channels” between each other and transact back and forth directly, and only when the channel is closed does the Lightning Network transmit the final tally to be recorded on-chain. These nodes can also be strung together, making a much faster, cheaper payment system that only interacts with the main network a fraction of the time. 

Ethereum, of course, also has solutions along these lines. For one, there is the Raiden Network, designed to be Ethereum’s version of the Lightning Network, as well as a more general blockchain product called the Celer Network. These projects implement not only off-chain transactions but also state changes, which allow for the processing of smart contracts. Currently, the biggest drawback with these systems is that they are a work in progress, and there are still bugs and other technical issues that can arise if channels aren’t created or closed correctly.

A similar idea is something called “sidechains.” These are basically blockchains that are “branched off” of the main chain, with the ability to move the native asset between them. This means sidechains can be created for specific purposes, which will keep that transaction activity off of the primary network, freeing up the overall bandwidth for things that need to be settled on the main chain. This is implemented for Bitcoin through the Liquid sidechain, and Ethereum’s version is known as Plasma. One downside here is that each sidechain itself needs to be secured by nodes, which can lead to issues with trust and security if a user is unaware of who is running them behind the scenes.





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Is DeFi technology easy enough to adapt to non-finance industries?

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Decentralized finance is far and away the hottest topic in crypto, touted as a way to make a fortune by backing the right token, but also a tool for taking the crypto you were hodling in a cold wallet and set it to work earning interest at extraordinary rates.

There’s a reason DeFi has grown so large so quickly that it has slowed the Ethereum blockchain where most of the projects live to a crawl, and sent gas prices for transactions soaring to $10, $50, even $100 at times.

DeFi is mostly talked about in terms of taking over the banking and brokerage functions that big finance thrives on, but the technology can be used to revolutionize many other businesses, from energy to e-commerce.

That reason is simple: At its core, decentralized finance is about eliminating the middleman.

Why give a bank your money — for a paltry fraction of 1% interest — for it to loan out, when you can loan it out for orders of magnitude more through a crypto lending site?

Or invest it in a liquidity pool that uses an automated market maker to create a shared pot of tokens that cryptocurrency traders can sell to or buy from, rather than waiting to find a trader who wants to buy what they’re selling at the price they want. The way liquidity pools work is that liquidity providers lock funds into pools in exchange for fees paid on each transaction — which are usually paid in an exchange’s native token.

All you’re doing, really, is replacing the institutions facilitating those transactions —the man in the middle of taking it from Jane and giving it to John — with smart contracts that automate both the introduction and the exchange of currency. In other words, it turns a peer-to-business-to-peer transaction into a peer-to-peer transaction.

The difference is blockchain’s immutable nature, which makes it impossible for either side to cheat. Because it is trustless, you don’t need to pay a trusted intermediary to do that for you.

Beyond finance

Financial transactions are the low-hanging fruit for DeFi, as they are very frequent and the value of the currency being traded is so large. That said, DeFi in its trading, staking and yield farming formats can get pretty complex. But, that’s mostly because people are willing to do very risky things like betting on margin with borrowed money.

However, DeFi works for pretty much any data you need to transfer from one party to another. That can be e-commerce, insurance, digital identity, and even electric power — the possibilities are endless. And in most cases, they are fairly simple.

Decentralized energy is raising enough interest that it’s been given its own nickname — DeEn instead of DeFi — even though it also uses DApps and smart contracts, and generally lives on the Ethereum blockchain. Other than removing the middlemen — brokers and utilities — the only real difference is kilowatts instead of kilobytes.

A year ago, German sustainable energy firm Lition launched its blockchain-based, decentralized peer-to-peer Energy Exchange, which lets individual consumers choose exactly which source to buy their energy from inexpensive or green or local power producers — whatever they choose.

It’s up and running, and according to a power industry publication consumers are saving an average of 20% on utilities while power producers are seeing revenue go up 30%.

Decentralizing ecommerce

E-commerce is another field ripe for disruption by DeFi, and one of the companies doing it is Uquid, which is aiming to build a bridge between DeFi and e-commerce.

One way it is doing this is through its Defito Finance arm, which concentrates on shopper loyalty programs using tokens earned with every sale or purchase.

The site pulls in three techniques commonly used in DeFi trading, loaning and mining operations and adapts them to the needs of an e-commerce site.

Shopping mining is a loyalty program that creates and awards newly mined tokens with every purchase from Uquids many online stores, which offer everything from video games and music to subscriptions for streaming services like Spotify and Xbox Live. This uses one of Defito’s native tokens, the DeFi Shopping Stake (DSS). Once mined, these tokens are loaded into a smart contract that lets them be used for future purchases from the Uquid sites, or for staking in the liquidity pools.

Defito’s other token is the DTO, a governance token which can be earned by contributing liquidity to the shopping liquidity pool. Instead of making it possible for cryptocurrency traders to buy and sell tokens, the Defito pools represent digital goods on Uquid’s ecommerce sites ranging from games and business software to gift cards and mobile top-up cards. An automated shopping maker connects pools of goods from different suppliers, allowing token holders to search for and track the best prices for the amount of those goods they wish to buy. These sites accept cryptocurrency in payment.

Both DTO and DSS can be used for staking and payment, but DTO brings governance voting rights, including on whether DSS tokens should be burned to increase their value or used to develop the rewards system.

Another DeFi token is Uquid (UQC), a decentralized ERC-20 token that can be used for a variety of more traditional DeFi services including staking, lending, borrowing and token swaps, as well as goods including utility, grocery, and pharmacy vouchers from chains around the world.

Finally, Uquid has recently added a fourth token for its new NFT marketplace, NFTD. The non-fungible tokens are at the heart of a digital products marketplace where they can be used to provide buyers of digital goods clear ownership rights. It’s a Binance Smart Chain utility token aimed at things like social media content from TikTok and YouTube videos to photographs and music, as well as Uquid’s other digital content.

Disclaimer. Cointelegraph does not endorse any content or product on this page. While we aim at providing you all important information that we could obtain, readers should do their own research before taking any actions related to the company and carry full responsibility for their decisions, nor this article can be considered as an investment advice.



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China debuts blockchain-based digital yuan salary payments in Xiong’an

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China is progressing with its central bank digital currency (CBDC) tests, debuting blockchain-enabled salary payments in the digital yuan.

According to the official website of the Xiong’an New Area, the People’s Bank of China (PBoC) has successfully completed the nation’s first on-chain wage payouts in the digital yuan.

Announcing the news on Saturday, Xiong’an authorities said that the pilot involved guidance and support from the Shijiazhuang-based PBoC branch, the Bank of China Hebei Xiong’an branch, as well as the National Development and Reform Commission.

The new CBDC pilot used a blockchain-based payment platform to distribute salaries to workers on spring afforestation projects in Xiong’an. Engineering subcontractors made payments directly to builders’ digital wallets from a public wallet and recorded the relevant data on a blockchain.

According to the announcement, blockchain-based salary payouts significantly simplified the wage payout process. The implementation reportedly marks the first combination of blockchain technology with the digital yuan.

Related: China’s blockchain project BSN to pilot global CBDC system in 2021

Xiong’an was one of the first four regions to pilot China’s CBDC in April 2020. In February, the Xiong’an branch of the Agricultural Bank of China in Hebei produced the first digital yuan-designed hardware wallet. The product was developed by the Party Working Committee of the Xiong’an New Area and the PBoC’s branch in Shijiazhuang.