There is no question that Bitcoin has revolutionized the way people approach spending and transferring money. It isn’t perfect, though, not by any means. One of the biggest problems that Bitcoin could face in the future is the ability to scale or expand. It needs to become more efficient in terms of processing transactions before it can become a serious competitor to other forms of payment like credit cards. There is an ongoing debate in the cryptocurrency community about Bitcoin’s ability to scale. Let’s take a look at the debate and the technology.
The Bitcoin Scalability Problem Defined
Scalability in Bitcoin refers to the harsh limits on the number of transactions that can be processed by the Bitcoin network. Blocks are the fundamental part of the blockchain, and each block is limited in the amount of data it can contain. There is also a limit to the frequency at which blocks can be processed. At the present time, each block can be created in roughly ten minutes. About 7 Bitcoin transactions can be processed each second. The blocks were programmed by Bitcoin’s developer to be a maximum of 1 MB in size.
Let’s contrast some of this information with how VISA credit card and debit card transactions are processed. VISA handles, on average, about 24,000 transactions each second. That is vastly more than the 7 that can be handled by Bitcoin. The takeaway from all of this is that Bitcoin is not very liquid. In other words, there still exist some strong barriers on one’s ability to move Bitcoin even though most users of the currency never encounter a problem when they are making transactions.
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It’s a Catch 22. The more Bitcoin transactions that are made, the longer it could take to process those transactions. Also, if the demand for Bitcoin increased so would the fees associated with processing. All of this means that the utility of Bitcoin is somewhat compromised. Some contend that this is why the currency has yet to achieve more acceptance around the globe by financial institutions and other large entities that move a lot of money.
Can The Block Size Be Increased?
One solution that has been proposed to solve the Bitcoin scalability problem is to increase the maximum size of blocks on the blockchain. It seems to be a simple solution, but it has ultimately failed due to a lack of agreement in the community. Some day that the blocks should be increased to 2MB. Others wanted to go as high as 32MB.
At the heart of the debate around this proposal were concerns that increasing block sizes could lead to mining monopolies. Only those with the most powerful mining rigs would be successful at solving the problems presented to verify the blocks. Increasing the size of blocks also means that mining equipment would become more expensive. Eventually, there would be no profitability in mining Bitcoin. This idea was shot down by the core development team of Bitcoin.
There was, however, one proposal regarding the increase of block size that did succeed. Segregated Witness, or SegWit, is a type of soft fork that addresses Bitcoin transaction malleability. Transaction malleability was considered to be a weakness in the overall security of Bitcoin. SegWit also increases the block size by an approximate factor of two, and it allows for the implementation of the Lightning Network.
Most of the proposals which advocate increasing the block size are associated with a fork of the Bitcoin blockchain. In effect, they would create a whole new token that utilizes the Bitcoin framework for its functionality. So far, none of these proposals have been able to gain a foothold in the cryptocurrency community.
Arguments against increasing block sizes include the position that Bitcoin is Bitcoin, and nothing will change that. Those who take this point of view tend to believe that those who have a problem with Bitcoin’s lack of scalability should just create new coins on their own blockchains that will resolve the problem. Indeed, some developers have done exactly that. One need only to look at the cryptocurrency exchanges to see how many altcoins have emerged in recent years, most of which claim to improve upon the flaws of Bitcoin.
SegWit2X as a Possible Solution
The initial version of SegWit was successful in solving some of the problems that are associated with Bitcoin’s ability to scale. It was only natural that developers then began to see if SegWit itself could be improved to make greater headway.
There was a conference in New York in 2017 in which the idea for SegWit2X was introduced. The concept could not have been more simple. The developers suggested combining the original SegWit with an increase in block size to 2MB. Therefore, the SegWit transaction capacity could be multiplied by a factor of 8.
A target date for the implementation of SegWit2X was announced. The project was moving forward. Then, there was a great deal of debate among those in the Bitcoin community and the core development team. For one thing, they pointed out that there was no way to prevent transactions from occurring on both versions of the platform. There was no replay protection. Some were also concerned that this new platform would give too much power to miners.
The rift led to the abandonment of the platform before it could be released on its target date. There is still a possibility that something similar could appear in the future, but it is highly unlikely.
Other Ideas for Technical Solutions
Developers that have an interest in Bitcoin and its ability to scale continue to work on the problem. There have been many advancements suggested, but all of them are still in a development stage. On of the approaches that is popular at the moment is known as Schnorr Signatures. What this idea does is consolidates the signature data that is a part of each block on the blockchain. By making this consolidation, less data on the block is consumed by signatures.
It may even be possible to integrate Schnorr Signatures with SegWit for faster processing times. More transactions could be handled without the need to increase the size of the block. There is merit here that some miss. It will probably take a combination of measures to solve the scalability problem for Bitcoin. No single solution seems to be the answer. It is also true that the focus of solving the problem has now moved from expanding the block size to increasing the amount of data that can be placed on a block.
Another possibility is the continued development of the Lightning Network. The Lightning Network is essentially an additional protocol. It is a second layer that runs atop Bitcoin. It creates channels where microtransactions can be carried out. Those transactions are only added to the main Bitcoin blockchain once the transactions have been settled and agreed upon by the participants.
Bitcoin Must Scale
Even though there is an ongoing debate about how to accomplish it, everyone agrees that Bitcoin must scale if it ever wants to compete with other types of payment systems. To match VISA, the digital token would need to scale by a factor of 1,000. A recent article in the Washington Post proposed a way to make this possible. The solution? Find a way to increase the block size. Here we are back to the beginning. The difference this time is the lead developer of Bitcoin is involved in trying to make it happen.
It would seem that the new idea revolves around getting people to upgrade their nodes or hardware that is connected to the Bitcoin network. As we mentioned earlier, this means more expensive mining operations that will probably culminate in most mining being done by a few select entities. Gavin Andresen has stated that the goal of the new work is to completely remove the limitations on block size. That could mean that some miners will refuse to process large blocks by default.
It will be interesting to observe the developments in this subject of Bitcoin scalability over the coming years. In the meantime, it is also useful to keep an eye on cryptocurrencies that have already made headway in solving the problem with their own blockchains.