Blockchain scalability and the fragmentation of crypto

Key takeaways

• Permissionless blockchains work by providing monetary incentives to decentralised validators. Yet the mechanism for maintaining these incentives necessarily entails congestion effects and high fees. These high fees encourage the use of alternative chains, leading to a fragmentation of the crypto landscape.

• Newer blockchains have higher capacity, even if these come at the cost of greater centralisation and weaker security. Differences in the design also preclude blockchain interoperability.

• Limited scalability and a lack of interoperability not only prevent network effects from taking root, but a system of parallel blockchains also adds to governance and safety risks.

• Despite fragmentation, cryptocurrencies on different blockchains exhibit strong price co-movements, as they often share the same investor base, and growth is sustained by speculative buying of coins.