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Why Scalability Is Still the No. 1 Problem in Crypto

Security, interoperability, and scalability are arguably the biggest challenges in today’s crypto scene. The last one is particularly sensitive since it concerns retail investors and businesses. Also, it is one of the last barriers separating us from mass crypto adoption.

Nevertheless, a big challenge generally comes with an even more significant investment opportunity. Today, we will analyze the industry’s state of affairs from the angle of scalability.

Ethereum’s Show

Few will argue that Ethereum stole the show during the first half of 2021. It was when the second-largest cryptocurrency kept breaking ATH after ATH to eventually shatter $4,000 and go beyond. However, the actual development of its blockchain increased the mainstream attention to the largest crypto ecosystem.

The London hard fork and Altair upgrades lie at the heart of the blockchain. These upgrades introduced Ethereum Improvement Proposals (EIPs) to change the fee structures that users pay and miners earn. Finally, they brought the ETH burn mechanism, paving the way for Ethereum to become a deflationary asset, among others.

In October, the Altair upgrade enabled various teams to work on different aspects of the ETH chain. Their goal was to rehearse the most crucial step in the migration process to ETH 2.0 to a PoS system.

These teams are constantly growing. For instance, more than 20% of all new Web3 developers in 2021 joined the Ethereum ecosystem. By extension, this means that all these freshly-cooked experts are now working on the same challenge of scalability. This speaks volumes of this second-generation blockchain. Also, it suggests that the long-awaited working scalability solution is imminent.

On top of that, according to Vitalik Buterin:

2021 saw L2 scaling go from theory into practice for the first time. At the beginning of the year, we barely had 1-2 L2 solutions on the mainnet. In contrast, now we have this thriving Layer 2 scaling ecosystem.

The biggest Layer 2 projects include Arbitrum, Boba (former OMG), Loopring, Optimism, etc.

The Race to Solve Scalability

The second half of 2021 saw several leading alternative Layer 1 solutions, like Solana, Terra, or Cardano, take the stage. New-generation L1s are boasting of their better fees, speeds, and efficiency over the old scaling pioneer. Still, they are not without caveats.

Take Solana, one of the hotshots in the Ethereum killer suite. Bank of America went so far as to call it the Visa of digital assets:

“[Solana’s] ability to provide high throughput, low cost, and ease of use create a blockchain optimized for consumer use-cases like micropayments, DeFi, NFTs, decentralized networks (web3) and gaming,” Bank of America analyst Alkesh Shah wrote in the note to clients just a few weeks ago.

Therefore, it’s not surprising Solana’s native token SOL grew +9,400% last year alone. While other scaling alts, like LUNA or MATIC, soared 13,700% and 14,600%.

Jaw-dropping growth rates come with proportionally higher risks. For instance, Solana’s network went down four times in less than six months. Also, the SOL-ETH bridge lost a whopping $326M to hackers. These events might raise some glaring red flags for the more risk-averse investors.

But crypto wouldn’t be crypto if newer and more sophisticated projects wouldn’t constantly surface in every domain. Scaling and Layer 1s are by no means exceptions. For example, Hathor Network and Aleph Zero seem to take Crypto Twitter by storm. Also, they attract massive attention among investors and highlight their respective technological advantages.

How to Choose a Winning Horse in Crypto

Over 10,000 projects exist in the crypto industry by various estimates. Some call a majority of them “shitcoins” for apparent reasons. The fact we have several dozen solid projects dealing with the issue of scalability shows its importance.

Needless to say, many of the new generation Layer 1 and Layer 2 projects have their technological edge over Ethereum. As long as the latter can only deliver a measly 30 tx/s rate, ordinary crypto investors must pay hefty fees. For instance, they now pay $50-100 for a simple ERC-20 transfer.

Nevertheless, most of these advantages are still on paper. Also, alternative Layer 1s’ ecosystems are still tiny, blockchains unreliable. Lastly, the resources behind these projects cannot sustain large orders typical of the Ethereum ecosystem.

As for the investing aspect, sometimes picking the proper race circuit might be enough. However, you must do your due diligence and responsibly beforehand. Both categories of these projects obviously have pros and cons, while the potential is enormous. It’s essential to remember we are already talking about the most challenging and volatile asset class globally.

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Not keeping all of your eggs in the same basket seems like the best choice. On the other hand, over-diversification might have considerable opportunity costs, especially if the investment capital is relatively modest. Therefore, a balance between ETH and 1-2 alternative Layer-1 choices seems like a no-brainer for most.

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