Can Bitcoin Scale?

A few years after Satoshi Nakamoto released his bitcoin paper in the world, cryptocurrency users began to see potential problems: bitcoin is not too liquid.

For systems that are claimed to replace fiat payments, this is a big barrier. While Visa handles around 24,000 transactions per second, bitcoin can process up to 7. Unless something can be done about this, the bitcoin utility is limited.

So began the "scale debate," which polarized the community and issued a wave of technological innovation in finding solutions. But while significant progress has been made, sustainable solutions are far from clear.

The problem arises from bitcoin design: Satoshi program blocks to have a size limit of about 1MB each, to prevent network spam.

Because each block takes an average of 10 minutes to process, this works for a small number of overall transactions. Increased demand will definitely lead to increased costs, and bitcoin utilities will decrease.

Don't think so

A simple solution at first seems to be an increase in block size. But the idea turned out to be not simple at all.

First, there is no clear agreement about how much should be increased. Some proposals advocate for 2MB, others for 8MB, and one wants as high as 32MB.

The core development team believes that increasing block size altogether will weaken decentralized protocols by concentrating mining power - with larger blocks, only stronger miners who will succeed, and faster race for machines can finally make bitcoin mining unprofitable. Also, the number of nodes that can run a blockchain that is much heavier can be reduced, further concentrating networks that depend on decentralization.

Second, the method of change is controversial. How do you run the entire system update when participation is decentralized? Should everyone update their bitcoin software? What if some miners, nodes and traders don't do it?

And finally, an existential argument arises. Bitcoin is bitcoin, why should it screw it up? If someone doesn't like it, they are welcome to change the open source code and launch their own coins (indeed, some have done that).

What's more, Satoshi no longer exists to tell us what he originally intended. And if there is, will he care? Didn't he design the bitcoin to run alone?

I have an idea

In 2015, developer Pieter Wiulle revealed a solution that, at first glance, looked like it could calm all groups. Segregated Witness, or SegWit, increases the block capacity of bitcoin without changing its size limit, by changing the way the transaction data is stored. (For more detailed accounts, see our explorer.)

SegWit is deployed on the bitcoin network in August 2017, through a soft fork (to be compatible with nodes that don't update). Apart from the initial excitement about its benefits, however, its absorption is slow. While many wallets and other bitcoin services are gradually adjusting their software, others are reluctant to do so because of perceived risks and costs.

Take two

Some industry players argue that SegWit is not far enough - it might help in the short term, but bitcoin will sooner or later fight back its growth limits.

In 2017, coinciding with the CoinDesk Consensus conference in New York, a new approach was revealed: Segwit2X. This idea - supported by some of the biggest sector exchanges - combines SegWit with an increase in block size to 2MB, effectively multiplying pre-SegWit transaction capacity by a factor of 8.

Far from resolving the problem, the proposal triggered a wave of further disputes. The opening method (through public announcements rather than increasing proposals) and the lack of replay protection (transactions can occur in both versions, potentially causing multiple expenses) make a lot of ratings. And the redistribution of perceived power from developers to miners and businesses threatens to cause fundamental divisions in the community

In the end, the idea was canceled a few months later, just weeks from the date of the implementation target

Meanwhile…

Other technological approaches are being developed as a potential way to increase capacity.

Schnorr's signature offers a way to consolidate signature data, reducing the space needed in the bitcoin block (and increasing privacy). Combined with SegWit, this can allow a much larger number of transactions, without changing the block size limit

And work is running on lightning networks, the second layer protocol that runs on bitcoin, opens a fast micro transaction channel that only settles on the bitcoin network when channel participants are ready.

Closer
So where are we now? The adoption of the SegWit upgrade is slowly spreading throughout the network, increasing transaction capacity and lowering costs.

Most blocks are just over the 1MB mark, and transaction costs - which jumped to more than $ 50 in December 2017 - have fallen back to around $ 4 at the time of writing.

Progress is getting faster on more advanced solutions such as lightning, with transactions sent on testnets (as well as some using real bitcoin). And the potential of Schnorr's signature drew ever increasing attention, with several proposals working to detail functionality and integration.

While the use of bitcoin as a payment mechanism seems to have taken a backward seat from its value as an investment asset, the need for a larger number of transactions is still urgent because the fees charged by miners for processing now are more expensive than fiat equivalents. What's more, taking into account that we are still in the early stages of cryptocurrency evolution, the development of new features that enhance functionality is very important for the potential of the underlying blockchain technology to be realized.
Powered by Blogger