In Bitcoin’s case, the most obvious fix is to increase block size. More space, more transactions. Easy right? Not so fast. The problem is not technical but political, because there are now so many stakeholders that pleasing them all is impossible. This solution might make perfect sense to the core developers who maintain, update and improve the software, but it isn’t popular with the miners, who run it and secure the network; or the companies that run wallet services; or the end users who have to pay fees to submit transactions; or the large holders and evangelists who are still influential in the space.

To get round that impasse, the Bitcoin community has recently gone with the implementation of something called segregated witness, more commonly known as Segwit. This is where the transaction signatures, or ‘witnesses,’ are stripped off within the input and moved towards the end of a transaction. The code assigns heavier weights to the transaction data and less weight to the witness, meaning you can move more transactions through a block. That update went live in late August, and while adoption will take a while, it should eventually double the block size.

Meanwhile, the Ethereum crew are working on something called the Metropolis upgrade, which comes in two parts. The first part, called Byzantium, has a whole lot of small improvements to the code, which should improve privacy, increase security and allow blocks to be mined around 10 seconds faster. This update is currently scheduled for mid October. The second part, called Constantinople, doesn’t have a release date, but will further increase security and allow for greater flexibility in the programming of smart contracts.

Ultimately though, these solutions just kick the can down the road. In the long run, the big public blockchains don’t need 8X or 20X capacity upgrades. If they want to compete with existing global payment solutions they need 5000X or 10,000X upgrades.

To get there, one proposed solution is to take transactions off the main chain. Bitcoin is calling this the Lightning Network, while Ethereum has named theirs Raiden. These are like mini ledgers that branch off from the main blockchain, and whose activity occurs inside a black box. Many different parties can send funds between themselves inside that box by constructing and cryptographically signing transactions at huge volumes and at practically zero cost, with smart contracts ensuring the results are embedded back into the public blockchain for permanence and security. Not only would this create even greater potential capacity than VISA’s network, it paves the way for the long promised possibility of microtransactions, which would fundamentally alter the nature of all commerce on the internet.

By the way, if you want to really nerd out in this stuff then you need to be following Preethi Kasireddy. Formerly at Andreessen Horowitz and Goldman Sachs, she’s now a full time blockchain engineer and easily the best technical explainer I know of.

A whole new way of validating transactions

The scaling solution you should really be keeping an eye out for is something called ‘proof of stake.’ To explain this you need to understand that current generation blockchains are secured by ‘proof of work,’ in which the group with the largest total computing power makes the decisions. These groups operate vast data centers to provide this security, in exchange for the currency specific to that particular blockchain. But it comes at a cost. The more difficult the problem, the longer it takes to solve, which means it takes more electricity to compute. Thus the reward costs time and money, and the bigger the blockchain gets, the slower it goes.

Proof of stake does away with this system. Instead of miners spending heavy computing power to solve a mathematical problem to reach consensus, all participating nodes place a bet on blocks. The nodes whose block is the honest block (i.e. contains no fraudulent transactions) get rewarded. The nodes whose block turns out to be dishonest get penalised; the amount of their bet gets debited from their balance. Placing bets doesn’t require high-performing computers and electricity. All a node needs to be eligible to get rewarded is some stake that it can place a bet with. The idea behind this method is, “whoever has the maximum stake in the blockchain must have the loudest voice.”

What’s interesting about this system is that it works in a very similar fashion to traditional financial instruments such as interest. Except unlike traditional interest, there’s no difference between the amount charged by the lender or the borrower. Everyone wins.

Fat and thin protocols

A disruptive technological medium tends to move a system from closed, to open, and then closed again. In the beginning, early adopters and hobbyists praise its decentralising and democratising force. Inevitably though, corporate power takes over and centralises control. Radio, for example, was initially a hobbyist’s paradise that gave everyone an equal voice, but eventually the airwaves were commercialised by stations. The early years of cinema, pioneered by lone filmmakers and small movie studios, gave way to the Hollywood behemoths. In its first decade, the internet looked like it was going to flatten all the middlemen, but instead it turned into walled gardens.

Blockchain is the latest chapter in that story. However, because of the way it works, it’s less susceptible to centralisation than the technologies that came before it.

To explain why, let me go back to something I mentioned in the beginning of this article — protocols.

The internet was created off two protocols, TCP/IP, which allowed computers to speak to each other, and HTTP, which allowed different pieces of text to link to each other. These protocols were designed as an open, common resource, and produced immeasurable amounts of value. However, instead of that value accruing to the public, most of it got captured and aggregated by giant companies (Google, Facebook, Amazon etc.) in the form of data. These companies cleverly used the underlying protocols to build their own, enormous layers of applications over the top. And now that the data is in their silos, they’re very unwilling to share it.

That means that the modern day internet is composed of a ‘thin’ protocol and a ‘fat’ application layer. Protocols, by default, are open, whereas companies, by default, are closed. And since most of the value created by the internet (and by us, its users) now resides in the private, application layer, we’ve ended up with a winner take all situation, as the giant tech companies take advantage of network effects to remain dominant.

Blockchain flips the equation

The layers of the big, global public blockchains that are currently being built are comparable to the early protocol layer of the internet.

However, unlike the internet, the replication and storage of user data happens across the protocol itself, via an open and decentralized network rather than via applications that control access to their separate silos of information. Because most of the data resides in the protocol itself, and since that protocol is a common resource, the private companies building in the applications layer get a much smaller fraction of the overall value.

The blockchain in other words, is the opposite of the internet. It has a fat protocol layer and a thin application layer.