What are the technical limits to the global adoption of cryptocurrency? This is a very difficult question to answer. This article wants to clarify some technical aspects of Bitcoin technology; in particular, we will explore one of the most important issues in technical development of all major cryptocurrencies: the so-called “scaling problem”.
The scaling problem
The “scaling problem” (or even “scaling debate”) is the attempt to understand how to get a blockchain capable of handling all the transactions necessary to become a global currency. In short, a system able to handle through Bitcoin (or any other cryptocurrency) all the payments you need: buy food at the supermarket, go on holiday, pay taxes and make donations. To give an idea of the scale of the problem, Bitcoin cannot handle more than a few hundred thousand transactions per day. On the contrary, VISA handles more than 150 million transactions per day. How to achieve the same performance while maintaining security and decentralization? This problem is not trivial. Vitalik Buterin, the founder of Ethereum (the second largest cryptocurrency by market cap after BTC), talked about “scalability trilemma”: a cryptocurrency can hardly be simultaneously scalable, decentralized, and secure. These are three characteristics that tend to counterbalance each other and that it’s hard to put together (seeHEREfor a more technical discussion about these aspects).
In the history of Bitcoin, the problem of scalability is due to the fact that the Bitcoin blockchain, by construction, is “increased” every 10 minutes by a “block” that is added to the history of all transactions, the so-called “blockchain” (chain of blocks). Each of these blocks has a maximum size of 1 megabyte, and can contain up to 4000 transactions. This number has increased in the last two years thanks to some changes (including Segwith) but 4000 transactions every 10 minutes are equivalent to 576000 transactions per day: too little compared to Visa. What happens if, in case of adoption, bitcoin network processes more transactions than it can handle? Basically, it forms a “queue”. At that point, space on blockchain is too scarce for every user, so miners include in the blocks the transactions that are willing to pay more to enter. These are the “transaction fees” that compose the “fee market”. They means higher costs for the users. Even just one dollar per transaction is enough to cut off many of the poorest areas of the globe from the possibility of using BTC as a currency.
How to solve the problem?
There are two main kind of solutions:
1) Increase the amount of data that can be managed on a blockchain, in particular, increase the size of the blocks. This seems to be a very easy solution for scaling and adoption, but it might pose a problem: larger blocks are harder to manage at a network level. Sending larger blocks to all miners slows the process, and storing the blockchain becomes more and more complicated as its size increases. In this way, even if everyone can execute transactions, the ability to verify them and have the full transaction history is concentrated in the hands of those with high-performance hardware, making Bitcoin potentially less decentralized and so keeping users from being “their own banking system”. On the other hand, these disadvantages depend on the technology available to store and transmit data, which is steadily growing. Some initiatives tried to address this problem: for example, Bitcoin developer Peter Wille, in July 2017, suggested an increase in block size of 17.7% per year, at a similar rate to the one at which our data storage capacity is growing. However, no agreement has ever been reached on this point within Bitcoin. Some miners and users have abandoned BTC for other cryptocurrencies, especially Bitcoin Cash. Therefore, we move on to solution 2.
2) Create other methods of payment parallel to the blockchain, for example Lightnin network. Lightnin network is a “second layer” built over the Bitcoin blockchain, which allows the opening of channels between users through which they can make transactions. Only the opening and closing of the channel are recorded on the blockchain, while, once the channel is open, users can transfer Bitcoins through it. These movements are stored locally by the parties involved, but leave no trace on the Bitcoin blockchain (therefore, avoiding unnecessary amounts of data). This is a solution that to date represents the most considered development in the Bitcoin environment. It has been criticized by some because it risks centralizing the consensus around a few big users who act as “nodes” to execute transactions. Here you can see more information about the development status of Lightnin Network
Negative effects on Bitcoin: from panic to fork
Around the scaling problem have been built many of the market events of Bitcoin of the last two years: in alternating phases, 2017 has seen a growing number of transactions made on Bitcoin with a consequent increase in cost, as we can see from the graph below. This has led to a stronger appreciation of alternative coins, other cryptocurrencies that try to solve the scaling problem in different ways. More precisely, due to a moment of “clogging” of Bitcoin, June 2017 saw a high growth of altcoins, especially Ethereum, considered by some as a possible “new Bitcoin”. Later, the distrust in Bitcoin became panic, causing a collapse of the crypto market that was overcome with the agreement for the implementation of Segwith (an improvement that, at the same time, lightened the size of transactions on the network and worked as the anteroom to Lightnin Network). In short, Bitcoin has opted for this second solution: the scaling off-chain. As a result of these events, some of the users left Bitcoin for the hard fork that gave birth to Bitcoin Cash. The struggle between Bitcoin Cash and Bitcoin characterized the next six months of the crypto market, with three distinct periods of Bitcoin “clogging” and Bitcoin Cash price increase, in mid-August, mid-October, and mid-December of the same year.
Today, as we write, the number of Bitcoin transactions has slightly decreased. Many transactions were speculative movements, that now have diminisced: the market is much less “euphoric” than in the second half of 2017. Bitcoin Cash, who has experienced a further Hard Fork on November 15, 2018, is far below Bitcoin in terms of price and adoption. In the meantime, Lightning Network is in an advanced stage of development.
Again, these events highlight the importance of the underlying technology in the Bitcoin market, and vice versa. Scaling is a crucial element in the evolution of both, and will probably continue to be so in the coming years. For the moment, let’s see what 2020 will bring…