The mission of the Cardano project is to deliver decentralization to everyone, especially those who need it the most. This may sound like a phrase that every blockchain project can use. The reality is that there are not many blockchain ecosystems that can deliver decentralization to people. With increasing fees for Bitcoin transactions, the debate is that on-chain transactions will only be affordable for the rich. While first-class citizens can enjoy the benefits of decentralization, second-class citizens will have less decentralized solutions available, or even just custodial ones. If we are satisfied with this idea of the future, blockchain technology will fail because it will not solve any problem. The availability of decentralization will increase with the number of blockchains in the crypto industry. If you put maximalism aside, you will find that it is possible to achieve high adoption and be a strong alternative to traditional financial institutions.
Decentralization For All Is A Challenge
First of all, it is important to say that it is a technological challenge for each team to build a global decentralized blockchain that would have satisfactory scalability.
What counts as satisfactory scalability? This can be tricky to answer. We need some context.
Every day, people make several hundred million digital financial transactions. In the US, approximately 150 million credit card transactions occur daily (1,739 TXs per second). 40 million transactions per day take place through PayPal (462 TXs per second). Around 660 million Visa transactions take place globally every day (7,638 TXs every second).
Current financial systems have a fast settlement. When paying by card, the payment can take only a few seconds with relatively high reliability.
Blockchain networks have no chance to compete with financial systems in terms of TPS and settlement speed. Blockchain networks are more suitable for financial services (DeFi) than for payments. However, it is possible to try to build a less decentralized blockchain for payments.
Blockchain projects have different decentralization and scalability. Scalability can be measured through the number of transactions that the system can process per second (this metric is not suitable for Cardano, but we can ignore it in this article).
Bitcoin can process less than 10 transactions per second (it has 7 TPS). Cardano's TPS is roughly 20 (block size is 90,112 bytes, block time 20 seconds). Ethereum is about the same.
Bitcoin will not scale better on the first layer (L1). Scalability is to be solved by the Lightning Network (LN), i.e. the second layer (L2).
Ethereum will scale primarily through L2 networks. The IOG team plans to improve the scalability of L2 and at the same time, they are working on L2 networks (we already have Milkomeda for example).
Some projects can process hundreds to thousands of transactions per second. For example Ripple, Solana, Avalanche, etc. These projects do not need second layers. They can already meet the demands of the real world to a large extent today.
We could examine the quality of decentralization and argue that projects with high TPS usually only delivered scalability, but not decentralization.
In the context of the article, we could call such projects unsatisfactory, because we want decentralization to be available to everyone, not a highly scalable network. However, that might not be fair. We would have to carefully examine the quality of decentralization. This could be quite subjective, as at the moment there is no unified view of what exactly a high-quality decentralized blockchain is.
In this article, we want to look at the topic from a philosophical point of view rather than a technical one. So let's say that all the mentioned projects are more or less decentralized.
Global adoption requires scalability in the order of thousands of TPS. Scalability in the order of tens to hundreds of TPS may be insufficient.
L1 vs. L2
In some cases, it makes sense to talk about the ecosystem rather than just the blockchain project. Blockchain can be the center of an ecosystem around which other networks and applications will emerge. A typical example is Bitcoin and Lightning Network, but also Cardano and Hydra.
Cardano takes this concept even further through Partner chains. Ethereum is essentially an ecosystem with many L2s. Ethereum is significantly more decentralized than all L2s (some L2s are essentially centralized).
The core of the ecosystem, the blockchain, will be the most decentralized. Additional networks and applications in the ecosystem will scale better at the cost of less decentralization.
Of course, for blockchain projects preferring TPS over decentralization, this consideration does not apply. We can consider these blockchains as good payment networks with less emphasis on quality decentralization. This is not to say that only Cardano, Ethereum, and Bitcoin projects strive for decentralization and others do not. All projects can (and should) strive for better decentralization.
What we mean is that technological limitations naturally create different levels of decentralization in ecosystems. This can be interpreted to mean that decentralization is a scarce service, therefore it can be expensive and exclusive.
Exclusivity can (and will) be perceived by people as unfairness in the system. Only the rich will be able to economically afford on-chain transactions, while the poor will become second-class citizens dependent on less decentralized services. Often they will even be forced to use custodial services.
The problem is that this is in direct conflict with the principles of the blockchain industry.
Decentralization is there to free us from dependence on middlemen. It makes no sense for us to build a system in which the middlemen remain for the poor. Such a system would not solve any problem that blockchain can potentially solve.
If we don't ensure inclusiveness and fairness for all, the entire industry will cease to make sense.
L1 networks must be the most decentralized in the ecosystem, but all L2s must still be well decentralized. Ideally, almost all people should be able to make an on-chain transaction from time to time, i.e. use L1.
Let's remind you that if you want to use LN, you must first submit (and pay) an on-chain transaction that will open the LN channel for you. The LN channel does not exist forever and it is necessary to close it from time to time (and open another new channel).
The inclusivity and functionality of LN are to a large extent directly dependent on the scalability of the Bitcoin protocol.
We Need More Blockchains
Some Bitcoiners claim that on-chain Bitcoin transactions will only be available to the wealthy and early adopters, not to newcomers. On-chain transactions will probably only be used by banks and institutions. Not ordinary people.
I dare to say that if someone believes this, and at the same time thinks that Bitcoin can succeed in its mission, then he does not understand that people do not wish to be second-class citizens.
One of the reasons for the adoption of cryptocurrencies is to ensure better fairness, i.e. the impossibility of abuse of power by middlemen. If there are middlemen in the new (seemingly better) system, this system will fail over and over again for the same reasons that the current one fails.
I will give one example.
Through the blockchain, the number of coins and tokens in circulation must always be verifiable, including who owns them at any given moment. If there will be custodial solutions in the ecosystem, this cannot be guaranteed. More precisely, the system will not be able to protect assets from theft by intermediaries.
Users must not be faced with a choice of whether to use the custodial service or not to use the system at all.
Some Bitcoiners say that custodial LN wallets are a good solution. From my point of view, they are not. If people are forced to send BTC to a third party, it is a loss from a decentralization perspective. A third party can steal all customers' BTC coins. Coins can be stolen by a hacker or seized by an authority. Don't we want to build the exact opposite system where this will not be possible?
The Bitcoin ecosystem cannot provide decentralization for everyone. This is also obvious mathematically.
If all Bitcoin blocks had only transactions related to the opening of the LN channel and nothing else, only 500K new users could be onboarded to LN. That's roughly 200M people per year. Onboarding 1 billion people would take 5 years.
In practice, it is necessary to use the Bitcoin protocol for normal transactions, including closing existing LN channels. If only a quarter of the Bitcoin block size were used to onboard newbies, only 50M could be onboarded in a year. In that case, onboarding 1 billion people could take 20 years.
Bitcoin has Inscriptions, Ordinals, and BRC-20 tokens. Other new technologies may emerge. LN transactions will compete for block space with other transactions with a different purpose.
If you take off your maximalist glasses, you will find that it is beneficial for the crypto industry if people accept the existence of many blockchains.
Decentralization will be more economically accessible to more people if more blockchains exist side by side. At the same time, it will accelerate adoption.
One ecosystem has no chance to succeed and beat all others unless it is to be a blockchain preferring TPS over decentralization.
Low Scalability Causes Problems
I remember the year 2017. Bitcoin transactions were very expensive (50 USD and more). Settlement took days. People used to say that Bitcoin doesn't work because they sent a transaction and it wasn't settled. Some even thought they had been cheated.
People wanted to sell BTC on the exchange, but they couldn't because their transactions were waiting for many days in the mem-pool.
Many people choose not to use self-custody wallets. They prefer to hold crypto assets on CEXs because they can sell and buy them quickly. Some have changed their minds, understanding that holding assets on CEXs during a bear market is dangerous. Some may have understood the point of decentralization and done so for ideological reasons.
However, most crypto holders still do not use self-custody wallets.
They therefore cannot use LN, but neither can DeFi. I dare say this is one of the reasons for the slow adoption.
Low scalability forces people to use custodial solutions instead of decentralized solutions.
Are we going to repeat the same mistake again in the next bull market?
First of all, we must have advanced technologies. Secondly, we have to be objective about what the given ecosystem can handle and what it can't. Maximalism hinders adoption.
Decentralization comes first. The second is inclusiveness and fairness, i.e. the availability of decentralization. The availability of decentralization is directly proportional to scalability. If one system is not scalable enough, we need to connect multiple systems.
Bitcoin maximalism was born from the belief that everyone must use one money system and that is BTC. Unfortunately, it has been forgotten that the economic affordability of decentralization is an equally, if not more, important issue than the existence of sound money.
If blockchain technology does not allow anyone in the world to use a self-custody wallet of a relatively well-decentralized network, society will not undergo the fundamental financial and social transformation that is expected from this industry.
The Bitcoin ecosystem has no chance of delivering decentralization to all people on the planet. Onboarding just 10% of the population would take perhaps a few decades. We are talking about the current state of technology (we neglect further possible developments).
Cardano is one of the most decentralized blockchains in the crypto industry (probably the most decentralized blockchain in the top 10) with a plan to increase scalability. The Cardano ecosystem will not only have DeFi, but also payment networks. Perhaps one of the payment networks will be Hydra. I dare say that Cardano may be a suitable solution for many decentralization lovers in the future. BTC on Cardano can be a better choice than CEX or custodial LN wallets from a decentralization point of view.
Let's stop saying that on-chain transactions will only be for the rich. Instead, let's look for solutions so that everyone can afford them.