Summary
Blockchain network congestion occurs when the number of transactions submitted to the network exceeds its processing capacity.
Increased transaction activity, smaller block sizes, and slower block times can all contribute to network congestion.
Network congestion can lead to higher transaction fees, slower transaction confirmation times, and a poor user experience.
In the spring of 2023, a surge in transaction activity related to BRC-20 tokens caused significant congestion on the Bitcoin network, leading to a spike in pending transactions and fees.
What is Network Congestion?
Network congestion occurs when the number of transactions submitted to the network exceeds its capacity to process them. This phenomenon can be triggered by various factors, including external elements like market volatility, as well as inherent network characteristics such as block size and block time.
Before delving into the details, it is crucial to understand the process of adding blocks to the blockchain.
How Does Blockchain Technology Work?
A blockchain is a chain of blocks, each containing transaction data created by users. Each new block added to the chain is permanent and immutable.
These blocks are propagated across nodes in a decentralized network, with each node storing a copy of the blockchain. Blockchain technology, underpinned by cryptography and game theory, forms the foundation of cryptocurrencies like Bitcoin and Ethereum.
To fully grasp why blockchain networks become congested, we need to explore key concepts that affect a network's ability to process transactions: the mempool, candidate blocks, finality, and the longest chain rule.
What is the "Mempool"?
The mempool refers to the collection of unconfirmed transactions waiting to be included in the next block.
For example, when a transaction is broadcast on the Bitcoin network, it is not immediately added to the blockchain. Instead, it first enters the "mempool" (short for memory pool), essentially a waiting area for all pending transactions. Once a transaction is confirmed, it is removed from the mempool.
What is a "Candidate Block"?
A candidate block, also known as a "proposed block," is a block proposed by miners or validators to be added to the blockchain. These blocks contain unconfirmed transactions that have been broadcast to the network but not yet added to the blockchain.
For a candidate block to become a confirmed block, it must be mined or validated according to the blockchain's consensus mechanism. For instance, Bitcoin's Proof of Work (PoW) consensus mechanism requires miners to compete to solve complex mathematical puzzles. The first miner to solve the puzzle can add their candidate block to the blockchain and receive a reward.
Ethereum's Proof of Stake (PoS) consensus mechanism randomly selects validators to propose candidate blocks. Other validators then attest to the block's validity. Once a block receives enough attestations, it transitions from a candidate block to a confirmed block.
What is "Finality" in Blockchain?
Finality refers to the point at which a transaction or operation can no longer be altered or reversed. Once a transaction achieves finality, it is permanently recorded on the blockchain and cannot be changed or deleted.
On the Bitcoin blockchain, transactions are broadcast to the network and added to the mempool. Miners select and validate transactions from the mempool, including them in a new block to be added to the blockchain. Transactions included in the block are considered confirmed, but theoretically, other miners could still mine competing blocks.
The finality of a transaction increases with the number of confirmations. Bitcoin transactions are typically considered "final" after six additional blocks are appended to the block containing the transaction. Ethereum's shorter block time means more confirmations are recommended to achieve a similar level of trust as "finality."
What is the "Longest Chain" Rule?
As mentioned above, multiple miners can produce new valid blocks within similar timeframes. This can lead to forks in the blockchain.
The "longest chain" rule is the principle that the valid version of the blockchain is the one with the most computational work invested (usually the longest chain of blocks). This results in "valid" blocks on shorter chains (often becoming orphaned or stale blocks) being discarded, and their transactions returned to the mempool.
When Ethereum used Proof of Work (PoW), it also followed the longest chain rule. After transitioning to Proof of Stake (PoS) in 2022, the network adopted a newer fork-choice algorithm that measures the "weight" of a chain—the cumulative sum of validator votes, weighted by the validators' staked Ethereum balances.
What Causes Blockchain Network Congestion?
Blockchain network congestion occurs when the number of transactions submitted to the network exceeds its processing capacity.
Here are several factors that can contribute to blockchain network congestion:
Increased Demand
As more people submit transactions to the blockchain, the number of unconfirmed transactions in the mempool may exceed what can be included in a single block. Blockchains with inherent limitations on block size and block time are particularly affected by this.
Sudden price fluctuations can lead to increased transaction volumes, causing surges in transaction activity or widespread adoption cycles.
Small Block Size
Each blockchain has a defined block size, which is the maximum size of a block. The block size limits the number of transactions a block can contain.
For example, Bitcoin was initially designed with a block size limit of 1 megabyte (MB). In 2017, Bitcoin underwent an upgrade called Segregated Witness (SegWit) to increase transaction throughput. This upgrade theoretically increased the block size limit to 4MB.
If the number of transactions exceeds this limit, network congestion can occur.
Slow Block Time
Block time refers to how frequently new blocks are added to the blockchain. Bitcoin adds a new block approximately every 10 minutes. If transactions are created at a faster rate, a backlog can form.
What Are the Consequences of Network Congestion?
Blockchain network congestion can lead to several negative outcomes, hindering the smooth operation of the network.
Higher Transaction Fees
Due to the incentive mechanism, miners prioritize transactions with higher fees. Thus, during network congestion, users often need to pay higher fees to incentivize miners to prioritize their transactions. This can make using the blockchain more expensive than usual, especially for small transactions.
Delayed Transaction Confirmation
Network congestion can increase the waiting time for transaction confirmation and finality. In extreme cases, transactions may remain unconfirmed for hours, days, or even longer, leading to user frustration.
Poor User Experience
High fees and slow confirmation times can result in a poor transaction experience, reducing the adoption and usability of the blockchain.
Market Volatility
Congestion can amplify uncertainty and exacerbate market volatility. If many users want to sell a cryptocurrency but the network is congested, the prolonged processing time may cause panic and a rush to offload assets.
Other consequences include security risks and network centralization risks. Specifically, delayed confirmations can increase the risk of double-spending, while higher fees can lead to centralization of mining power.
Examples of Network Congestion
Both Bitcoin and Ethereum have experienced severe network congestion.
Bitcoin Network Congestion
Bitcoin's price surge in late 2017 to early 2018 led to one of the most famous instances of network congestion. Bitcoin's sudden popularity caused a spike in demand and transactions, resulting in severe delays and skyrocketing fees. The average transaction fee once exceeded $50.
In the spring of 2023, a surge in BRC-20 token-related transactions caused significant congestion on the Bitcoin network, leading to a spike in pending transactions and fees. Unconfirmed transactions peaked at 400,000, creating a bottleneck in the mempool. Transaction fees increased by 300% over a few weeks.
Ethereum Network Congestion
A notable example of Ethereum network congestion occurred in 2017 with the popularity of the "CryptoKitties" project, which significantly slowed the network. The rise of decentralized finance (DeFi) also caused congestion, driving up gas fees.
Any blockchain network can become congested. However, congestion on Bitcoin and Ethereum is more noticeable due to their popularity and importance, affecting a broader range of users.
Solutions to Mitigate Network Congestion
Addressing blockchain network congestion is a complex issue. There are multiple approaches, each with its own pros and cons.
Increasing Block Size
Increasing block size allows each block to process more transactions, effectively boosting network throughput. However, larger blocks take longer to propagate across the network, increasing the risk of temporary forks. They also require more storage, potentially leading to greater centralization.
Reducing Block Time
Reducing block time enables the network to process transactions faster. However, shorter block times can increase the number of orphaned blocks, potentially compromising security.
Layer 2 Solutions
Off-chain solutions process transactions outside the main blockchain and record their final state on-chain. Examples include Bitcoin's Lightning Network and Ethereum's Plasma. These solutions can improve scalability but are complex to implement and introduce additional security concerns.
Sharding
Sharding is a technique that splits the blockchain into smaller partitions, each capable of processing transactions and smart contracts. This can significantly increase network capacity. However, like Layer 2 solutions, sharding adds complexity and may introduce additional security risks.
Other potential solutions include fee adjustments and scaling solutions like Optimistic Rollup and Zero-knowledge Rollup. Proof of Stake (PoS) consensus mechanisms are generally considered faster than Proof of Work (PoW).
Conclusion
As blockchain technology is expected to see broader adoption in the coming years, network congestion will become increasingly prominent. A network's ability to efficiently handle large volumes of transactions is crucial for its widespread adoption and usability, especially for systems aiming to facilitate real-time, everyday transactions.
While blockchain network congestion poses significant challenges, the community continues to develop solutions to mitigate these issues. This is why research into enhancing blockchain scalability remains a top priority in the industry.
