Bitcoin's fundamental goal is to provide a digital and decentralized replacement of traditional currencies. In order to achieve this goal, the problem of the poor scalability of the Bitcoin protocol has to be solved first.
In the last chapters of the Bitcoin Explained series, the intrinsic motivation of the Bitcoin inventor and the first Bitcoin supporters were explained. The decisive reason for Bitcoin's invention was the desire for a fully digital, decentralized means of payment that could be used as an independent alternative to traditional currencies. Over the last few years, more and more Bitcoin enthusiasts have shared the goal of an independent currency. The increasing attention in the entire crypto sector and the associated increase in transaction volumes also highlighted one of the biggest weaknesses of the Bitcoin protocol: its scalability.
Scalability within Bitcoin means the limitations of the blockchain for the processing of multiple transactions. As already described, individual transactions are collected in a block. The maximum size of a block is clearly defined in the Bitcoin protocol. The general conditions of the block size and block generation of the Bitcoin protocol limit the average block generation time to 10 minutes and the maximum block size to 1 megabyte. Due to these restrictions, Bitcoin is limited to an average of 7 transactions per second (TPS), which led to inconsistencies within the Bitcoin community at a very early stage and was decisive for the fork of Bitcoin Cash. Ethereum's blockchain is able to process almost 20 TPS while the payment provider VISA is able to handle up to 45,000 TPS.
The crypto community is wildly debating the theoretical TPS limits, actual TPS averages and possible solutions to the scalability problem. A short overview of the TPS of different blockchains and payment providers shows a good sense of the current scalability limits of the respective systems. This refers to the maximum possible transaction speed (Claimed Transactions per Second (CTPS)) specified by the developers.
Why is it so difficult to increase scalability?
Bitcoin, like Ethereum, places great emphasis on ensuring that each blockchain records Bitcoin transactions and Bitcoin ownership at all times without any help from a central authority. However, as the number of users increases, it becomes increasingly difficult to maintain a balance between decentralization and accurate recording. Especially with regard to the day-to-day usage of Bitcoins for payment within apps, it is currently unlikely to record each payment directly, decentralized and accurately within the Bitcoin blockchain.
The difficulty lies in the way the proof-of-work approach works. The Bitcoin protocol is dependent on all network participants for "processing" the generated blocks. With the growing popularity of Bitcoin and the everyday use of Bitcoin, the number of blocks would increase enormously, which would increase the average time needed to complete a transaction. To counteract this slowdown of the protocol or to speed up the protocol even more, the size of the individual blocks would have to be increased to be able to verify more transactions within a block. However, as the block size increases, there is a danger that only a few participants - the large Bitcoin Miners worth millions - will be able to dismantle large blocks in a short period of time. As a result of this increasing focus on verification sovereignty in the Bitcoin protocol, decentralization is gradually being lost.
Blockchain experts are therefore trying to find solutions that balance this relationship and still increase performance.
Solution approaches in the Bitcoin protocol
A first approach to solving the scalability problem was already implemented by the community on 1 August 2017 as part of the Bitcoin Cash Hard Fork. The resulting Bitcoin cash blockchain is capable of dismantling larger blocks and thus verifying several TPS - with the risk of increasing centralization.
On 24 August 2017, only 3 weeks after the Bitcoin cash hard fork, Bitcoin core developer Pieter Wuille installed the "SegWit" transaction format ("Segregated Witness") in the form of a soft fork within the Bitcoin protocol. With SegWit, the block size of a single block can be increased from the conventional 1 MB to 4 MB. This is made possible by separating the signature data from Bitcoin transaction processes. By removing certain transaction information, its data capacity can be used to bundle additional transactions per second. Today, more than 40% of all Bitcoin transactions use SegWit addresses - with increasing popularity.
A scalability solution introduced in January 2015 is called "Lightning Network". The Lightning Network is a "second layer" solution to improve the capacity of several different blockchains. Presented as a kind of additional level of blockchain, the Lightning Network serves to take over the transaction processing. Since transactions no longer have to be processed within the "first level" of the Bitcoin blockchain, the Lightning Network serves to further unbundle the Bitcoin blockchain, reduce transaction costs and allow multiple transactions per second. The construction of the Lightning Network, however, is a work-in-progress process that takes time. From April 2018 to August 2018, the Bitcoin Lightning Network grew from 1500 nodes to 3000 nodes.
Next in Bitcoin Explained
The eighth part of Bitcoin Explained deals with the various advantages and disadvantages of crypto currencies (especially Bitcoin). Bitcoin is the frontrunner of a new technology and is still the most popular crypto currency. Nevertheless, the Bitcoin protocol contains a number of outdated structures that may eclipse Bitcoin in comparison to newer crypto currencies.
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