Blockchain is a t decentralised and secure way of storing information. This information is stored in blocks that are added to the network (or database) as this information is generated. Information can range from transactions in a cryptocurrency (as is the case for Bitcoin), to smart contracts (as is the case for Ethereum) or any other type of information.

In this regard, two key points will determine the network's efficiency, i.e. how fast this new information will be added to the database: 

The size of the block determines the volume of information that can be quickly added to the network. The bigger the block, the more information can be added to a blockchain.

The quicker new blocks are added to the network, the quicker the information in the database updates. 

There are currently all types of combinations, depending on block size and the rate at which new blocks are added. In Bitcoin's blockchain, for example, the block is usually two megabytes (2 MB) in size, but can very between 1 MB and 4 MB, and the blockchain is designed to take 10 minutes to add a block to the chain. As a result of these restrictions, the Bitcoin network has been criticised for having low scalability), but the speed of payments under this system is beginning to be addressed through Lightning Networks. Other blockchain networks that emerged after Bitcoin have a larger block size (Bitcoin Cash, BCH; has blocks 8 MB) or can add a new block to the network in less time (this is the case of Litecoin (LTC), where a new block is added every two and a half minutes, four times faster than Bitcoin).

Although adjusting these parameters (size and time) can improve network efficiency (more transactions could be conducted per unit of time). However, doing so could compromise network security, as this is based on the computational effort required from the nodes (proof-of-work consensus algorithm).

Increasing the block size and slashing the time it takes for a block to join the network would inevitably result in higher demand on the computational capacity of the nodes involved in blockchain mining. It is now quite common to find clusters of computers working together as a team, in what are known as “mining farms”, attempting to complete the proof of work (process for determining the entity that will add the next block to the blockchain).

As the number of Bitcoin network users increases – the more people attempting to solve the proof-of-work puzzle, the easier it is to solve, meaning that in order to maintain the 10-minute cadence, the difficulty must be increased.

In extreme circumstances, a small group of mining farms could even come to dominate the network. One of blockchain's security fundamentals stems from the existence of a high number of nodes that individually ensure that the network functions properly: accurate information, non-corruption and immutable information. If a smaller cluster of nodes is in control, this could prevent the blockchain network from working properly. A 51% attack refers to a type of attack on a blockchain network that allows a malicious miner, who holds more than 50% of the computational power (hash rate), to take control of the mining. This way, mining farms agree on which information (or transactions) are written (or executed) on the Blockchain.

The more nodes there are, the more decentralised the blockchain becomes. Increasing the number of blocks per unit of time or increasing the size of the block in the pursuit of efficiency ends up increasing the cost of maintaining the node, meaning that nodes fall in number and the network therefore becomes less decentralised.

Ultimately, the violation of the principle of decentralisation and the potential for the emergence of oligopolies in the pursuit of greater efficiency may diminish the security of the blockchain compared to that which was initially established. As is often the case, the fact that a technology is born based on the improvement of existing systems does not imply that it can be used other than initially intended. The need to regulate or create legislation and case law on blockchain is also currently under debate, though this will have to be done based on the different uses derived from this technology

This article is for educational purposes only and does not reflect the opinion or strategy of Banco Santander, and in no way should be considered as financial advice.

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