Scalability refers to any process, network, software or organization’s ability to accommodate increasing transaction volume on a blockchain.
Blockchains, especially Bitcoin and Ethereum, were not built for the large transaction volumes required for widespread use and adoption. Both Bitcoin and Ethereum use blocks to process transactions and each block needs to be verified by the entire network. Each block is limited in size and speed resulting in a limited number of possible transactions per second. For example, the original 1MB block size of Bitcoin translates to about 3-4 transactions per second. By comparison, Visa can process 24,000 transactions per second.
In this sense, Bitcoin does not ‘scale’ at the same rate as Visa. As a result, during Bitcoin’s peak in late 2017-early 2018 Bitcoin transactions sometimes took days even weeks to settle and fees skyrocketed. Much of the industry in 2018 is focused on scalability solutions.
For Ethereum, each block is limited by a 6.7 gas limit (gas being the computational effort it would take to implement a smart contract, for which miners charge a fee in Ether). The more transactions pile up, the more expensive it gets to process them, thus making the process not only sluggish but at times also unreasonably costly.
There have been countless proposals to resolve this issue. BitcoinCash originally suggested increasing block size and continues today on that trajectory. By contrast, Bitcoin has pursued off chain solutions most notably the Lightening Network which is a secondary layer which allows fast and low-cost transactions feeding them to the Bitcoin blockchain in larger chunks.
Ethereum is experimenting with Plasma, which is essentially many blockchains that branch out of the main blockchain. Similar to the Lightning Network, Plasma is an off-chain technology that is meant to facilitate multiple transactions.
Some companies such as IOTA, for example, created a whole new technology. IOTA built on the premise of distributed ledger technology to create a DAG (Decentralized Acyclic Graph) called the Tangle. Rather than creating blocks that are verified by the whole network IOTA works by forcing each new transaction to approve two other transactions.
There are nearly as many solutions for the problem of scalability as there are blockchains. The point is across the blockchain universe scalability remains one of the primary issues and points of development. It remains to be seen what solutions will succeed.