As revolutionary as Bitcoin was in 2009, it was created with a bottleneck. BTC’s role as a peer-to-peer electronic cash system has a finite lifetime. This became clear after the mass adoption of cryptocurrencies and blockchain technology. Its popularity exposed problems with high levels of traffic. In the world of cryptocurrency, this is known as Bitcoin scalability problem.
A victim of its success
It all comes down to popularity. Think of a start-up with a modest budget, like a bakery. This bakery has a website that displays a menu and a gallery full of gooey goodness. The bakery is prepared to serve its community. But then, one day, a celebrity drops by for a donut. The snack is so good that the celebrity shares a photo on social media. Millions of followers then flood the bakery’s website and cause the server to crash. This is essentially what is happening to Bitcoin. But exactly what is the Bitcoin scalability problem?
The scalability problem
Scalability refers to a network’s ability to increase its operational capacity. In Bitcoin’s case, transaction traffic is the root of the issue. More Bitcoin users means more transactions per minute. In December 2020, Bitcoin handled around 330,000 daily transactions. With so much competition for quicker transactions, miners now ask for higher transaction fees. Users who are willing to pay the fees get rapid results. Those who cannot or do not want to pay the fees simply have to wait. In short, the network cannot process all the transactions within a reasonable time while keeping transaction fees low.
Proof of work (PoW) blockchains like Bitcoin were created with a fixed network capacity and a number of problematic protocol rules. BTC’s blockchain transaction typically holds around 250 bytes of data. But Satoshi Nakamoto limited the size of each Bitcoin block to 1 MB. As a result, one block can only include a limited number of transactions. And since new Bitcoin blocks are created approximately every ten minutes, queues of pending transactions are now common. Currently, the only way to bypass the queue is to pay higher transaction fees. But since every user wants the same thing, the fees soon become astronomical.
At present, Bitcoin users must sacrifice speed for affordability and vice versa. It is a compromise that is making expansion slower. But some experts believe these trade-offs are an inseparable part of the blockchain’s DNA.
The industry’s greatest minds see scalability as a significant issue. But one expert has gone a step further, defining a combination of three factors. Vitalik Buterin, the co-founder of Ethereum, formulated the theoretical concept known as the Scalability Trilemma. The theory describes how difficult it is to achieve the three pillars of blockchain sustainability.
Buterin believes there will always be a compromise between these three aspects of blockchain protocol. Some blockchains are fast and secure but achieve this by being more centralized. Bitcoin’s blockchain is highly secure and decentralized, but less scalable. At present, there is no perfect solution to the trilemma. But there are some interesting concepts in development.
As with every problem, there are various scalability solutions currently being explored. Some of these rely on internal changes to the blockchain protocol. Others require integration from the moment of inception. There are also special Layer 2 and sidechain fixes in the works.
- Segregated Witness
Segregated Witness is a protocol edit implemented to Bitcoin. It removes a certain amount of data from each transaction. This leads to more transactions being included in one block.
Due to increased costs and technical complexity, full nodes are declining. Masternodes are an attempt to fill that void. Acting as full nodes, their operators are rewarded for their work. This is much like miners being rewarded on PoW blockchains. The difference is that masternodes are fully dedicated to processing transactions.
A sidechain is a secondary blockchain connected to the main one via a two-way peg. Put simply, the two chains are interoperable, meaning that assets can flow freely from one to the other.
- Increased block size
Initial solutions for Bitcoin were simple. Due to the 1 MB size limitation, only a limited number of transactions can be included in one block. The obvious thing to do was to increase the size of the block. This was the solution chosen by Bitcoin Cash, which was a Bitcoin fork (a change in the blockchain’s protocol that the software uses to decide whether a transaction is valid or not). For Bitcoin Cash, the block size was increased first to 8 MB and then 32 MB.
However, this solution had one fundamental flaw. The problem would eventually reappear with the future increase in network usage. So, expanding the size of the block is only a temporary solution. Additionally, there are unwanted consequences to increasing the size of the block. This is because bigger blocks make it more difficult to download the blockchain. The general public might find it impossible to run the Bitcoin software in their own homes, which could lead to less decentralization.
- Shorter confirmation time
Another alternative would be decreasing block confirmation time. However, this idea could make it difficult to confirm that a new block is valid. If confirmation takes too long, it could undermine Bitcoin’s security. This is the solution implemented by Litecoin, Bitcoin’s 2011 fork. New blocks are created within 2.5 minutes, which is four times faster than Bitcoin. But some solutions have an indirect effect on block size and confirmation time.
- Segregated Witness
Bitcoin attempted to improve scalability by indirectly altering the size of the blocks. It successfully implemented Segregated Witness (SegWit). Together with a soft fork, SegWit increased the size of the blocks by removing signature data from the transactions recorded there. However, the upgrade has not solved the issue.
- Lightning Network
Special payment channels are another popular attempt at improving scalability. The Lightning Network uses smart contract functionality in the blockchain to enable instant payments across a network of participants. These payments are off-chain transactions. But, again, this solution is far from perfect. For instance, the network requires users to meet certain conditions to use it, such as having a lightning node.
- Proof of stake
For some time, Proof of Stake (PoS) blockchains have shown promising results. They are already tackling the main scalability issues that PoW faces. Soon, they may bring about the end of PoW dominance. This would profoundly change the industry, since PoS networks require no mining.
There are many interesting solutions to the scalability issue. The vast majority are fixes to the existing infrastructure. However, the scalability problem exists because the protocol is like a living organism. As the world changes over time, the protocol needs to adapt and evolve. But adaptability only gets you so far.
With this in mind, the best solutions to scalability are always going to be the networks created to overcome the problem. Today’s youth are more technologically proficient than older generations. Likewise, future networks will be more scalable than those created years ago. They will be created to overcome the problem.
This knowledge is a direct result of Nakamoto’s innovation. But pioneers rarely achieve perfection. They signpost a new direction and expose the pitfalls along the way, giving followers the chance to achieve even more. Bitcoin followers can learn from its mistakes. This is the value of the scalability issue – it is the mother of numerous innovations.