Module 3: How Blockchains and Transactions Work
The Scaling Problem
Chapter 7 of 13 · about 5 minutes
7.1 Why not just make it faster?
After paying $46 for a swap in Chapter 2, Mint had an obvious suggestion. "If blocks are full and fees are high, why don't they just make the blocks bigger? Or faster? Payment card networks handle huge numbers of transactions. Why can't a blockchain?"
"That question started one of the biggest fights in crypto history," said Hash. "The short answer is that you can make a blockchain faster. But every way of doing it costs you something else."
7.2 How much can a blockchain handle?
Throughput is usually measured in transactions per second (TPS). The numbers vary with transaction types, so treat these as rough orders of magnitude.
| System | Approximate throughput |
|---|---|
| Bitcoin | A handful of transactions per second |
| Ethereum mainnet | Tens of transactions per second |
| Major card payment networks | Thousands of transactions per second on average, with much higher peak capacity |
| High-throughput blockchains and Layer 2 networks | Hundreds to thousands, depending on design |
Bitcoin and Ethereum are deliberately limited. When demand exceeds that limit, users compete through fees, which is exactly what Mint experienced.
7.3 Why the limits exist
Remember from Module 1 that blockchains are secure because thousands of independent nodes each keep a full copy and verify every transaction. That's what lets the network operate without trusting anyone.
Every block must be downloaded, verified, and stored by every node. If blocks get much bigger or much more frequent, running a node requires more bandwidth, faster processors, and more storage. Fewer people can afford to run one. Over time, verification concentrates among a smaller group with powerful hardware, often professional data centres.
"So bigger blocks mean fewer people can check the rules," said Node.
"And fewer people checking means you're trusting a smaller group," said Hash. "Which slowly brings back the middleman problem crypto was meant to solve."
7.4 The blockchain trilemma
This trade-off is often summarised as the blockchain trilemma: a blockchain wants to be decentralised, secure, and scalable, but it's very hard to maximise all three at once.
| Property | What it means |
|---|---|
| Decentralisation | Many independent participants can run nodes and validate, with no small group in control |
| Security | Very expensive to attack, reverse, or censor transactions |
| Scalability | Can process many transactions quickly and cheaply |
Think of a restaurant kitchen. You want food that's high quality, fast, and cheap. You can usually have two easily. Getting all three requires a cleverer kitchen design, not just more pressure on the cooks.
The trilemma isn't a law of physics. Engineers keep finding designs that push the boundaries. But it's a useful lens for evaluating any blockchain's claims. When a network says it's extremely fast and cheap, ask what it gave up.
7.5 The block size wars
Bitcoin's community fought over this question for years. One side wanted bigger blocks to increase throughput and keep fees low for everyday payments. The other side wanted to keep blocks small so ordinary people could keep running nodes, and to scale through other layers.
The disagreement came to a head in 2017, when a group split off to create Bitcoin Cash, a separate blockchain with larger blocks. Bitcoin itself kept smaller blocks and adopted an upgrade called SegWit, which modestly increased capacity, and later supported off-chain systems like the Lightning Network (Chapter 9).
The market ultimately valued Bitcoin far more highly than Bitcoin Cash. People still debate what that proves, but the episode showed how seriously the community takes the trade-off.
7.6 Two broad strategies
Today, there are two main approaches to scaling, and the industry uses both.
Scale the base layer. Design a blockchain to be fast from the start, with larger blocks, faster block times, more efficient software, and higher hardware requirements for validators. These are sometimes called monolithic blockchains, because one layer does everything: executing transactions, agreeing on order, and storing data.
Scale with layers. Keep the base layer focused on security and decentralisation, and move most activity to additional layers that inherit some of its security. This is sometimes called a modular approach, splitting jobs across different layers. Ethereum has largely chosen this path, with Layer 2 networks handling most user transactions.
| Scale the base layer | Scale with layers | |
|---|---|---|
| Where transactions happen | Directly on the main blockchain | Mostly on Layer 2 networks |
| User experience | One network, simple | Multiple networks, bridging required |
| Node requirements | Higher | Base layer stays more accessible |
| Main trade-off | Fewer people can run validators | Fragmentation and added complexity |
| Examples of approach | High-throughput Layer 1 blockchains | Ethereum with rollups, Bitcoin with Lightning |
Neither approach is free of compromise. A high-throughput Layer 1 can feel seamless, but usually asks more of its validators. A layered system keeps the base layer decentralised, but spreads users and liquidity across many networks, which creates the bridging and network confusion we saw in Module 2, Chapter 9.
7.7 Why this matters for traders and investors
"This sounds like an engineering debate," said Mint. "Why does it matter to me?"
"Three reasons," said Hash.
Fees and speed affect strategy. Frequent trading or small transactions only make sense where fees are low.
Security affects risk. A cheap, fast network with weak decentralisation may be more vulnerable to outages, censorship, or reorgs.
Narratives affect prices. Competition between scaling approaches drives a large part of crypto's sector narratives, covered in Module 11. Understanding the trade-offs helps you judge claims rather than just repeat them.
7.8 Try it yourself
Pick two blockchains that market themselves as fast and cheap. For each, find out how many validators it has, the recommended hardware to run a validator, and whether it has experienced any network outages. Compare these with Ethereum's figures. What trade-offs do you notice?
Key takeaways from this chapter
- Bitcoin and Ethereum deliberately limit throughput, and high demand leads to higher fees.
- Bigger or faster blocks increase hardware requirements, reducing how many people can run nodes.
- The blockchain trilemma describes the difficulty of maximising decentralisation, security, and scalability together.
- Bitcoin's block size wars led to the creation of Bitcoin Cash in 2017.
- Blockchains scale either by making the base layer faster or by adding layers on top.
- Each approach has trade-offs, between validator accessibility and user experience, or between simplicity and fragmentation.
- When a network claims to be fast and cheap, ask what it gave up.