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24.10.2019

Bitcoin Scaling Problem Explained

Introduction

Each new crypto-related startup that has its own native cryptocurrency uses the blockchain technology. The foundation of every blockchain is a block that stores a piece of information. 

In the case of the Bitcoin blockchain, the block stores information about the previous transactions.

Initially, there were no restrictions on the size of the block until 2010, when a limit of 1 MB was set. Satoshi Nakamoto, a bitcoin creator, thought 1 MB would be enough for everyone but the scale of the whole ecosystem has grown up to unbelievable highs.

Alongside the growth of the user base, the number of daily transactions has grown either, which resulted in the absence of free space of the blockchain network.

After various proposals in August 2017, the bitcoin community decided to increase the block size up to 2 MB.

In November 2018 there was a hard fork that gave birth to a new cryptocurrency — Bitcoin SV (BSV), which size of a block initially was increased up to 32 MB.

Bitcoin SV even introduced restrictions at the level of 128 MB, and in July of this year, this limit was completely raised up to 2 GB.

Today, the transaction processing capacity maximum size on the traditional bitcoin blockchain is between 3.3 and 7 transactions per second (TPS).

The minimum transaction size is ≈ 225 bytes. However, it is important to understand that if you receive more than you send, then the size of the transaction and, therefore, the fees itself will be higher. But if you receive a few transactions, but send a lot of ones, then the size of the commission and the transaction itself will be lower.

The main problem with the Bitcoin scaling problem is that the current state of the system is different from what it was in the very beginning. The number of people using the Bitcoin blockchain has grown from several tens to millions.

Debates around the scaling issue

One of the oldest disputes in the bitcoin community is related to the size of the block. Larger blocks mean less network congestion, even though this leads to the increased storage size and affects TPS performance.

This issue has become the main theme for the community, as a number of well-known participants put forward proposals for improving bitcoins or BIP (Bitcoin Improvement Proposal).

With the popularity of Bitcoin, the number of transactions increased, but due to the limitation of the maximum block size, not all transactions were “placed” immediately.

This led to the critical condition when in May 2017, the expectation of the transaction being included in the block reached several days.

Solutions

There have been dozens of proposals for increasing the block size over the years. While some of them were successfully implemented, the others are still subjects for discussion.

SegWit

In November 2017, a new cryptographic protocol update called SegWit was released. As a result, SegWite increased the space of each new block. It’s also worth mentioning that because of SegWit, the bitcoin blockchain separated into two networks — Bitcoin and Bitcoin Cash.

Bitcoin Cash

Bitcoin Cash (BCH) was born on August 1st, 2017 as a result of a hard fork because of the SegWit protocol implementation. This alternative to original Bitcoin increased the block size from 1 MB up to 8 MB. Today, BCH is in the top 10 cryptocurrencies by market capitalization.

Lightning Network

Lightning Network (LN) is a technical solution developed as a protocol of the second layer of blockchain networks. Deployed on top of the Bitcoin network, LN uses advanced smart contracts to achieve higher transaction throughput while preserving the peer-to-peer nature of the bitcoin protocol.

There was also a BIP101 proposal that includes an immediate increase in block size up to 8 MB (doubling in size every two years). BIP100 proposal offers to increase the block size up to32 MB and give miners even more opportunities than they had. However, it has led to speculations on how miners could play the voting system.

There are also other concerns that such a significant increase, followed by a series of doubling events, could further reduce the number of participants on the network.

Besides the above-mentioned proposals, there were also other solutions, including Bitcoin XT, Bitcoin Classic, Bitcoin Unlimited, and BIP148 but they failed to gain popularity in the crypto-community.

Conclusion

Scalability is one of the most pressing issues in the development of cryptocurrencies.

However, these days there are dozens of new cryptocurrencies with a revolutionary solution to this issue, including IOTA and other crypto-projects.

The unresolved scalability issue becomes the main problem for the adoption and practical application of blockchain these days.

The solution to the scaling problem at each level of complexity will be different. By solving one problem, a whole universe will open up for new applications, which, in turn, will lead to another list of scaling problems.

Anyway, one thing is certain — an unambiguous consensus on the issue in the near future is unlikely.

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