Blockchain is a framework for building decentralized systems, and there are many blockchains out there. They have all manner of purposes, including the fast and nearly free transfer of payments, distributed storage, and shared processing power. Each blockchain must impose algorithmic rules that balance the collaborative relationship between users, miners, administrators, and other roles it might create in the pursuit of an efficient network. A metric close to any blockchain architect’s heart is Transactions Per Second (TPS). Transactions per second is not only a measure of speed but also of how difficult it is to mine the blockchain.
A well-designed engine burns fuel economically and provides sustained power, just as efficient blockchains incentivize participation and can cost-effectively distribute inputs. While engines are measured in RPM, blockchains use TPS as their preferred gauge of output. Centralized systems can handle many transactions out-of-the-box, because they rely on server power that is always available. Sourcing decentralized power for the same purpose isn’t as reliable because the system is drawing from an ever-changing number of remote peers, putting TPS under a spotlight.
There’s such a big emphasis on TPS because blockchain’s very first creation was Bitcoin, which is a way to transfer value safely, quickly, and inexpensively, thanks to its carefully orchestrated and incentivized system. Part of the justification for Bitcoin’s rising price was that it might one day unseat the world’s preeminent payment platforms, such as the Visa Network or even SWIFT. What ended up happening is that Bitcoin core developers prioritized safety (uncompromising decentralization) over speed and cost, causing the blockchain to clog as demand increased. This drove the price of transacting up as many found themselves paying a larger percentage of Bitcoin to push their payment through.
Learning Lessons From Low Speed
Even after a bandage in the form of a soft fork to expand block size, markets learned from Bitcoin’s folly. If a solution can’t check off all three boxes—safe, fast, and inexpensive—it faces a tough road ahead. It was burned into our memory that one of the biggest obstacles to success is sluggishness, in comparison to traditional solutions. Bitcoin remains at around four transactions per second while the Visa Network is capable of processing over 2,000 transactions per second at last count. Accordingly, this metric is prioritized for ambitious new blockchain solutions, and is a good indicator of how useful they’ll be upon launch. Part of this is because TPS applies to non-finance blockchain concepts as well.
Like ‘blockchain’, ‘transaction’ is also a general term that can be used to describe any transmission of data, which applies to virtually everything that a blockchain can be used for. A dApp (decentralized application) for secure chatting, for example, must draw on its peers to encrypt individual messages. By nature of its blockchain foundation, this involves exchanging chunks of data (“tokens” is a frequent misnomer), which must be verified, processed, and then recorded on the ledger. A chatting app, a game, or any other decentralized idea will need to handle as many user actions as possible, or else it cannot satisfy demand and will leave money on the table.
TPS Desirable for Devs and Investors Alike
The transaction speed limit was largely hypothetical, a bridge that wasn’t necessary to cross, until the rising popularity of dApps like CryptoKitties late last year. A simple game that employed Ethereum smart contracts to “breed” digital cats, CryptoKitties spiked in popularity as rare kitties found buyers for huge sums of ETH. This whimsical game managed to reveal significant scalability problems in Ethereum, putting markets on edge as one of the best and most valuable blockchain platforms struggled mightily to handle demand.
Venture capitalists and ICO investors therefore put a lot of stock in a project’s potential and current transactional power, because any blockchain that neglects this is already dead in the water. Solving the transactional bottleneck in a distributed system is now one of the largest issues facing blockchain projects with an ambition to serve a wide audience. Projects that manage to optimize one of the three main blockchain pillars also gain more investor interest because they’ve managed to solve one part of the big formula.
IOTA, for instance, uses a system called Tangle to make transacting totally free, all the time. By requiring participants to process payments before their own is processed, Tangle ensures that no transaction takes more from the network than it gives back. In the same way that IOTA raised over 3,000BTC for their solution to the transaction fee problem, ICOs that seek to remove the ceiling on transaction speed generate equally generous valuations. A recent project called Arweave raised $8.7 million, which was a result of its special perspective on TPS. With a proprietary protocol called Proof of Access, Arweave’s “blockweave” technology speeds up transactions by reducing the storage and verification burden on new peers.
Putting the Pieces Together
By now, investors are aware of the limitations of blockchain. When they see a project that addresses one of the technology’s many flaws, they see an opportunity and invest with vigor. Recently, blockchain projects that focus on boosting transactions per second are of special interest, because they solve a problem experienced universally across the space. These speed-obsessed blockchain companies will eventually cooperate with other network platforms that patch different holes, working together to create an efficient decentralized experience for everyone. It’s crucial to remember that distributed networks are an amalgamation of multiple technologies, and so if one wins the race to limitless TPS, everyone shares the prize.