Bitcoin Scaling Problem, Explained

Andrew Marshall
MAR 02, 2017
Bitcoin Scaling Problem, Explained

Cointelegraph

1.

Does Bitcoin have a scaling problem?

Yes, it does. It has been unresolved for a while and is getting worse with time.

Bitcoin runs on the software created by a programmer or a group of programmers known as Satoshi Nakamoto back in 2007-09. Despite the many improvements, which have been made by contributing developers over the course of Bitcoin’s existence, the code base is still pretty similar to what it was eight years ago and some of the limitations are still there.

The problem is, the current landscape of the Bitcoin ecosystem is very different from what it used to be back at the inception of the cryptocurrency. The number of people involved has grown from a few dozens of passionate enthusiasts to over 10 mln of everyday users.

The growing user base is naturally accompanied by a constantly increasing number of daily transactions, which are now counted by the hundreds of thousands. The unfortunate reality is that the Bitcoin network, in its current state, is unable to process all those transactions fast enough.

2.

Why is Bitcoin unable to cope with all the transactions?

The problem lies in a specific parameter called the “block size limit.” The current limit is insufficient for the ever-growing transaction intensity.

First, a very quick and basic introduction to how Bitcoin works for those who don’t know. All the transactions that have ever taken place in the Bitcoin network or will ever take place, are recorded on a public and immutable ledger called “The Blockchain.”

As follows from its name, the Blockchain is a sequence of blocks. Each block, in turn, is a cryptographically sealed collection of all transactions which have happened in the network over the past ten minutes. Every new block is permanently added to the end of the Blockchain so that every user can always check that each specific transaction has indeed taken place.

Back in 2010, Nakamoto introduced a block size limit of 1mb, meaning that blocks over the size of 1 megabyte would be automatically rejected by the network as invalid. This was a security measure, designed to prevent potential DoS attacks by hackers creating blocks of huge, or even infinite size and broadcasting them across the network in order to paralyze it.

That decision, however, has had an adverse long-term effect on the transaction capacity of the network.

Each transaction consists of important data: the sender, the recipient, the amount of Bitcoins in transfer, etc. That data takes some space, which is quite insignificant when talking about a single transaction. But it adds up when there are hundreds of transactions taking place every minute.

The current size limit of one megabyte per block can realistically support three to seven Bitcoin transactions per second. The problem here is that for the network of the current proportions that is already not enough. And it’s only getting worse as the user base keeps growing.

3.

What are the results of the insufficient block size limit?

The increase in average transaction times and fees. Basically, Bitcoin is gradually turning into a functional analog of wire transfers.

On a regular day, the Bitcoin network is still able to operate normally. However, sometimes it manages to reach peak loads and that’s when things get rough. Many users have been reporting wait times of several hours or even days on their transactions.

Moreover, the speed at which Bitcoin miners are likely to process any particular transaction depends directly on the size of the miners’ fee, set by the sender for every transaction. This creates a market of transaction fees: in order to have their transfers processed faster, the users have to compete with each other by setting ever increasing fees.

In the early days, the commissions were measured in mere fractions of a cent. Today, however, if you want to send the coins fast, you will have to pay a fee worth several cents or even dollars.

Both the transaction times and the fee sizes have been gradually increasing for the past several months, making Bitcoin look more like a functional counterpart to bank transfers. That is an existential threat to the cryptocurrency: if we have a more popular and widespread alternative to Bitcoin, why even use it at all?

4.

Is there a solution to the scaling problem?

There have been many proposed ways to solve it, none of which have been realized as of today.

The scaling problem has been under scrutiny for quite a while. Arguably, the first two serious attempts at fixing it were BIP 100 and BIP 101, where BIP stands for Bitcoin Improvement Proposal. They were introduced in 2015 by the Bitcoin core developers Jeff Garzik and Gavin Andresen respectively.

Both were aimed at increasing the block size limit an