Blockchains - an Imperfect Solution

Blockchains – An Imperfect Solution

Blockchains are at best a compromise – in their commitment to supporting the trustless transfer of digital assets between two or more parties, they must contend with bulky and inefficient processes:

Consensus – Blockchains and other distributed ledgers need a byzantine fault-tolerant proofing mechanism for multiple parties to agree on a specific outcome. This often requires the coordination of thousands of validators, requiring heavyweight code and uptime.

Immutability – To create a permanent state chain of information, data must be appended in discrete blocks or datasets. This must be done in an organised, agreeable but time-consuming way. Also, from a development perspective, immutability presents a problem, as software needs to be updated, patched, and maintained to be in its most ideal state. Immutability prevents this from happening.

Congestion – Because of the above, many blockchains have to contend with an overflow of parties wanting to transact, resulting in a backlog of transaction requests that end up in a mempool. The orderly processing of these requests can substantially delay transactions or cause transaction fees to rise as parties compete for priority.

Finality – When transactions occur on most major blockchains, the probability of a fraudulent or malfeasant transaction is highest immediately after the transaction is processed. Over time and with each new block appended to a chain, the probability that the transaction is reversed or fraudulent, declines. Blockchains need time to reduce the probability of fraud to near zero. This time may be expressed in a minimum number of block confirmations to finalise a transaction, further delaying the receipt of funds.

Transaction Fees – Since many blockchains have a transaction throughput that is less than their backlog during peak usage times, a transaction fee market must be established to prioritise transactions. In exceptionally busy periods, as parties pay more to prioritise their transactions, fees may escalate rapidly. Those who are unwilling to pay these high fees risk timing out and having their transaction dropped from the protocol. During Yuga Labs' The Otherside mint, transaction fees on the Ethereum blockchain spiked to over USD 1,000 per transaction, leading to a poor user experience and substantial loss of funds by participating parties. When transaction fees are artificially set too low as in the case of Solana – spamming by bots becomes a problem, resulting in degraded performance and outages.

Ultimately, these processes exist because blockchains are public, trust-less, and distributed. Their unique nature provides an invaluable tool for parties to transact safely and anonymously but at a compromise to what an ideal transfer mechanism should be for digital assets. For certain types of transactions, these bulky, costly, and time-consuming features can be eliminated while still enabling users to safely and securely transact amongst other parties. However, blockchains are still a necessary step in enabling transactions to be finalised and publicly auditable. Thus, an ideal solution leverages the benefits of an immutable ledger, while enabling the public transfer and processing of digital assets in a scalable, low-cost, and fast framework.