At the height of the bull run in late 2017, there was a huge influx of Bitcoin transaction. During that period, transaction fees skyrocketed and users were unable to send funds unless they paid extremely high values. The same happened to Ethereum in January and July of 2018. Occurrences such as these lead to growing concerns that, when there are a large number of users sending ETH and BTC, these currencies might not support low transaction fees and quick transaction speeds in their current form. It is clear that BTC and ETH need to improve their scalability before the user base can grow to such levels again.
The scalability issue in BTC and ETH
In traditional blockchain projects, each ‘block’ holds a record of transaction credits and debits. Miners add ‘blocks’ to the blockchain one after another using Proof-of-Work. Although it provides anti-DoS attacks defense and low impact of stake on mining possibilities, PoW can lead to scalability issues.
Both coins are working to solve this issue. The Bitcoin community released Segwit and they are working on the lightning network. Similarly, the Ethereum community is working on the Raiden Network, Sharding, and Plasma. Unfortunately, these technologies may not be fully developed and integrated for a while. Additionally, in BTC’s case, the lightning network may have hidden costs.
Alternative solutions: zero-fee coins, such as IOTA and NANO
While ETH, BTC, and other blockchain-based coins continue to simply update their existing blockchains to address scalability, some cryptocurrency projects are bringing in innovation by throwing out the idea of a traditional blockchain and, instead, using completely new data structures to solve scaling issues. Some of these projects even allow for free transactions and quick transaction speeds. IOTA and NANO are two of the most popular solutions.
- IOTA Tangle: Each time a computer broadcasts a transaction, it adds to the tangle (confirms) the previous two transactions that were broadcast using POW.
- NANO Block Lattice: Each user address (denoted by A, B, and C) has their own blockchain. Transactions are confirmed by external accounts, called representatives, using dPOS.
In other words, while traditional blockchains like BTC and ETH verify that a sender’s transaction is legitimate through resource-intensive calculations, these new data structures can verify that a transaction is legitimate through much less resource-intensive means.
This is a very simplified explanation, but it means two important things:
- Reduced costs: The inexpensive nature of transaction confirmation means that IOTA and NANO users do not have to pay other people to confirm their transactions – therefore there are no transaction fees.
- Increased speed: IOTA and NANO transactions do not have to wait in a mempool (waiting to be added to a block) before they confirm. This theoretically increases the speed of confirmation.
Zero-fee Coins vs Blockchain
What are the benefits of zero-fee coins such as IOTA and NANO?
- IOTA and NANO allow for new use cases.
- Both IOTA and NANO could process microtransactions, while this would not be feasible for coins that have transaction fees.
- Data can be freely transferred and connected between devices using IOTA, creating an internet of things (IOT) network.
- IOTA’s smart contract support (QUBIC) could purportedly decrease the cost of computation, create a scalable fognet, and more
- IOTA and NANO are highly scalable. Nano sends transactions significantly quicker on average than ETH and BTC. Theoretically, IOTA should also send transactions at a greater speed once volume increases and the coordinator is removed.
- IOTA and NANO are more environmentally friendly than traditional blockchains because the proof of work requires less computation than many blockchain-based coins such as BTC.
What are the benefits of blockchains like BTC and ETH?
- BTC and ETH have the first mover advantage and have much larger communities than IOTA or NANO. Almost all blockchain wallets and exchanges support BTC and ETH, while very few support IOTA and NANO.
- BTC and ETH are relatively time-tested and proven to be safe, while IOTA and NANO are not.
- IOTA will not be decentralized until there are more people or devices using the network (when the coordinator is removed). BTC and ETH, on the other hand, are already decentralized.
IOTA and NANO are novel technologies that appear to have a lot of promise. They each found original ways to solve the scalability issues that have plagued Bitcoin and Ethereum. However, they have not yet withstood the test of time. In fact, IOTA is still in a relatively nascent stage of development, and its final form may not be what people anticipate. Furthermore, IOTA and NANO appear to provide new uses, but aren’t widely used yet.
Bitcoin and Ethereum are the default cryptocurrencies for decentralized financial transactions and smart contracts respectively; their large communities may create a network effect in which they become the standard. Additionally, BTC and ETH may solve their scaling issues before IOTA and NANO gain market recognition.
The next few years should be interesting as scalability solutions become more fully developed and users decide which is best.