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Bitcoin scalability problem

Number of transactions per month

The bitcoin scalability problem is a consequence of the fact that records (known as blocks) in the blockchain are limited to one megabyte in size.[1] Bitcoin miner fees for processing bitcoin transactions rose to above $25 per transaction in December 2017, making small payments uneconomical.[2][3]

Bitcoin's blocks include the transactions on the bitcoin network.[4]:ch. 2 In contrast to Visa's peak of 24,000 transactions per second,[5] the bitcoin network's theoretical maximum capacity with the 1MB block size limit sits between 3.3 and 7 transactions per second.[6][7] There are various proposed and activated solutions to address this issue.

Contents

BackgroundEdit

The one-megabyte limit has created a bottleneck in bitcoin, resulting in increasing transaction fees and delayed processing of transactions that cannot be fit into a block.[8] Various proposals have come forth on how to scale bitcoin, and a contentious debate has resulted. Business Insider in 2017 characterized this debate as an "ideological battle over bitcoin's future."[9]

ForksEdit

A fork is what occurs when a blockchain splits into two distinct paths moving forward. Forks on the bitcoin network regularly occur as part of the mining process. They happen when two miners find a block at a similar point in time. As a result, the network briefly forks. This fork is subsequently resolved by the software which automatically chooses the longest chain, thereby orphaning the extra blocks added to the shorter chain (that were dropped by the longer chain). A blockchain can also fork when developers change rules in the software used to determine which transactions are valid.[10]

Hard forkEdit

Bitcoin Cash and Bitcoin Gold are examples of hardforks of bitcoin. As per CoinDesk, a hard fork is a change of rules that allows creating new blocks not considered valid by the older software.[10] As per Investopedia, a hard fork is a situation where a blockchain splits into two separate chains as a consequence of two distinct sets of rules trying to govern the system.[11]

Bitcoin XT and Bitcoin Classic both supported an increase to the maximum block size through a hard fork, as a method to improve scalability. Support for both proposals eventually fell over time.[12] Bitcoin Unlimited supports a variable block size limit, which may result in a hard fork.[9] A hard fork can split a network if all the network participants don't follow the fork.

Soft forkEdit

In contrast to a hard fork, a soft fork is a change of rules that creates blocks recognized as valid by the old software, i.e. it is backwards-compatible.[10] Per CoinDesk, a soft fork can also split the network when non-upgraded software creates blocks not considered valid by the new rules.[10] A user-activated soft fork (UASF) is a controversial idea that explores how to perform a blockchain upgrade that is not supported by those who provide the network's hashing power.[10]

Proposed scaling solutionsEdit

Various proposals for scaling bitcoin have been presented. In 2015, BIP 100 by Jeff Garzik and BIP 101 by Gavin Andresen were introduced.[13] By mid-2015, some developers were supporting a block size limit of as high as eight megabytes.[14]

  • Bitcoin XT was proposed in 2015 to increase the transaction processing capacity of bitcoin by increasing the block size limit.[15]
  • Bitcoin Classic was proposed in 2016 to increase the transaction processing capacity of bitcoin by increasing the block size limit.[16]
  • "The Hong Kong Agreement" was a 2016 agreement of some miners and developers, colloquially termed "The Hong Kong Agreement," that contained a timetable that would see both the activation of the Segregated Witness (SegWit) proposal established in December 2015 by Bitcoin Core developers, and the development of a block size limit increased to 2 MB. However, both timelines were missed.[17]
  • SegWit2x was a proposed hard fork of the cryptocurrency bitcoin. The implementation of Segregated Witness in August 2017 was only the first half of the so-called "New York Agreement" by which those who wanted to increase effective block size by SegWit compromised with those who wanted to increase block size by a hard fork to a larger block size.[18] The second half of SegWit2x involved a hard fork in November 2017 to increase the blocksize to 2 megabytes.[19] On November 8, 2017 the developers of SegWit2x announced that the hard fork planned for around November 16, 2017 was canceled for the time being due to a lack of consensus.[20]
  • Bitcoin Unlimited advocates for miner flexibility to increase the block size limit and is supported by mining pools ViaBTC, AntPool, investor Roger Ver and Bitcoin Unlimited chief scientist Peter Rizun.[21] Bitcoin Unlimited proposal is different from Bitcoin Core in that the block size parameter is not hard-coded, and rather the nodes and miners flag support for the size that they want, using an idea they refer to as 'emergent consensus.'[21] Those behind Bitcoin Unlimited proposal argue that from an ideological standpoint the miners should decide about the scaling solution since they are the ones whose hardware secure the network.[22]
  • BIP148 was a proposal that has been referred to as a User Activated Soft Fork (UASF) or a "populist uprising." It was planned to be triggered on 1 August 2017, and it sought to force miners to activate Segregated Witness.[23] It became unnecessary because miners opted to vote for SegWit activation using the BIP91 scheme.
  • Schnorr signatures have been proposed as a scaling solution by Blockstream's Peter Wuille.[24]
  • A 2006 paper by Mihir Bellare enables signature aggregation in O(1) size, which means that it will not take more space to have multiple signers. Bellare-Neven reduces to Schnorr for a single key.[25] Bellare-Neven has been implemented.[26][27]

Activated scaling proposalsEdit

Segregated WitnessEdit

Segregated Witness (SegWit) is an example of a soft fork. Blockstream co-founder and developer Pieter Wuille proposed Segregated Witness in December 2015.[28] SegWit is an update aimed at solving transaction malleability, a known weakness in bitcoin's security.[29] Segregated Witness is a system by which the signature data is segregated from other transaction data. Segregated Witness has been proposed as a solution for scaling, and has impacts in two ways.

Segregated witness makes a number of changes to the protocol. It changes how data is stored in each bitcoin block.[30] SegWit provides a boost in transaction capacity while remaining compatible with earlier versions of bitcoin software.[30] It fixes transaction malleability that has been a roadblock for other bitcoin projects.[30] SegWit allows for an easier implementation of the Lightning Network.[31]

Layer 2 proposalsEdit

Solutions such as the lightning network and Tumblebit have been proposed to operate on top of the bitcoin network to allow payments to be effected that are not immediately put on the blockchain.[32]

Lightning NetworkEdit

The Lightning Network is an in-development project that aims to fix the bitcoin scalability. Lightning Network will require putting a funding transaction on the blockchain to open a channel.[33] Payment provider Bitrefill tweeted in December 2017 claiming it was the first lightning transaction operating on the bitcoin network.[34] In January 2018 Blockstream launched a payment processing system for web retailers called "Lightning Charge," and noted that lightning was live on mainnet with 60 nodes operating as of January 18, 2018, and advised it should still be considered "in testing."[35][36]

See alsoEdit

ReferencesEdit

  1. ^ Hayes, Adam (18 October 2016). "The Three Major Bitcoin Protocols Explained". Investopedia. Retrieved 18 January 2017. 
  2. ^ "Bitcoin Avg. Transaction Fee historical chart". bitinfocharts.com. Retrieved 2018-01-07. 
  3. ^ Lee, Timothy B. (2017-12-19). "Skyrocketing fees are fundamentally changing bitcoin". Ars Technica. Retrieved 2018-01-07. 
  4. ^ Andreas M. Antonopoulos (April 2014). Mastering Bitcoin. Unlocking Digital Crypto-Currencies. O'Reilly Media. ISBN 978-1-4493-7404-4. 
  5. ^ Poon, Joseph; Dryja, Thaddeus. "The Bitcoin Lightning Network" (PDF). Retrieved 5 December 2017. 
  6. ^ "What is the Block Size Limit". CryptoCompare. Retrieved 6 December 2017. Currently, Bitcoin has the capacity to handle between 4-7 transactions per seconds 
  7. ^ Croman, Kyle; Eyal, Ittay (2016). "On Scaling Decentralized Blockchains" (PDF). doi:10.1007/978-3-662-53357-4_8. Retrieved December 10, 2017. The maximum throughput is the maximum rate at which the blockchain can confirm transactions. Today, Bitcoin’s maximum throughput is 3.3–7 transactions/sec [1]. This number is constrained by the maximum block size and the inter-block time. 
  8. ^ Jordan Pearson (14 October 2016). "'Bitcoin Unlimited' Hopes to Save Bitcoin from Itself". Motherboard. Vice Media LLC. Retrieved 17 January 2017. 
  9. ^ a b Oscar Williams-Grut and Rob Price (26 March 2017). "A Bitcoin civil war is threatening to tear the digital currency in 2 — here's what you need to know". Business Insider. Retrieved 2 July 2017. 
  10. ^ a b c d e Amy Castor (27 March 2017). "A Short Guide to Bitcoin Forks". CoinDesk. Retrieved 1 July 2017. 
  11. ^ Hayes, Adam (21 March 2017). "Can Bitcoin Hard Fork?". Investopedia. Retrieved 8 June 2017. 
  12. ^ Alyssa Hertig (24 May 2017). "Keep Calm and Bitcoin On? Developers Aren't Worrying About a Fork". CoinDesk. Retrieved 1 July 2017. 
  13. ^ Andrew Marshall (2 March 2017). "Bitcoin Scaling Problem, Explained". The Coin Telegraph. Retrieved 4 July 2017. 
  14. ^ Evander Smart (19 October 2016). "'Why is My Bitcoin Transaction Taking So Long?' Here's Why". The Coin Telegraph. Retrieved 4 July 2017. 
  15. ^ Alex Hern. "Bitcoin's forked: chief scientist launches alternative proposal for the currency". the Guardian. Retrieved 20 August 2015. 
  16. ^ Rizzo, Pete (19 January 2016). "Making Sense of Bitcoin's Divisive Block Size Debate". CoinDesk. Retrieved 22 June 2017. 
  17. ^ Pete Rizzo & Alyssa Hertig (24 May 2017). "Bitcoin's New Scaling 'Agreement': The Reaction". CoinDesk. Retrieved 29 June 2017. 
  18. ^ Haywood, Matthew (16 August 2017). "Segwit2x, 'The New York Agreement'". bravenewcoin.com. Retrieved 6 October 2017. 
  19. ^ Hertig, Alyssa (12 July 2017). "Explainer: What Is SegWit2x and What Does It Mean for Bitcoin?". CoinDesk. Retrieved 6 October 2017. 
  20. ^ Hertig, Alyssa (8 November 2017). "2x Called Off: Bitcoin Hard Fork Suspended for Lack of Consensus". CoinDesk. Retrieved 8 November 2017. 
  21. ^ a b Alyssa Hertig (14 May 2017). "CoinDesk Explainer: The Bitcoin Unlimited Debate". CoinDesk. Retrieved 29 June 2017. 
  22. ^ Pete Rizzo (20 March 2017). "CoinDesk Explainer: Bitcoin Unlimited: Mining Power Should Determine Hard Fork". CoinDesk. Retrieved 2 July 2017. 
  23. ^ Alyssa Hertig (8 June 2017). "Bitcoin's 'Independence Day': Could Users Tip the Scales in the Scaling Debate?". CoinDesk. Retrieved 29 June 2017. 
  24. ^ Alyssa Hertig (31 December 2017). "Most Influential in Blockchain 2017 #7: Pieter Wuille". CoinDesk. Retrieved 04 Jan 2018.  Check date values in: |access-date= (help)
  25. ^ https://github.com/kanzure/diyhpluswiki/blob/master/transcripts/bitcoin-core-dev-tech/2017-09-06-signature-aggregation.mdwn
  26. ^ https://github.com/bitcoin-core/secp256k1/pull/461
  27. ^ https://github.com/bitcoin-core/bitcoincore.org/pull/479#issuecomment-352875971
  28. ^ Corin Faife (5 January 2017). "Will 2017 Bring an End to Bitcoin's Great Scaling Debate?". CoinDesk. Retrieved 4 July 2017. 
  29. ^ Andrew Marshall (20 April 2017). "SegWit, Explained". CoinTelegraph. Retrieved 1 July 2017. 
  30. ^ a b c Hertig, Alyssa (23 August 2017). "SegWit Goes Live: Why Bitcoin's Big Upgrade Is a Blockchain Game-Changer". CoinDesk. Retrieved 23 August 2017. 
  31. ^ van Wirdum, Aaron (23 August 2017). "Segregated Witness Activates on Bitcoin: This is What to Expect". Bitcoin Magazine. Retrieved 24 August 2017. 
  32. ^ Torpley, Kyle (2017-03-14). "Bitcoin is Now Useless for Micropayments, But Solutions are Coming". Nasdaq. Retrieved 2018-01-04. 
  33. ^ "Lightning Network, Explained". CoinTelegraph. Retrieved 2017-11-16. 
  34. ^ "Payment Provider Bitrefill Runs Successful Lightning Transaction Test". Coindesk. 2017-12-29. Retrieved 2018-01-04. 
  35. ^ "Blockstream Launches Micropayments Processing System for Bitcoin Apps". Coindesk. 17 January 2018. Retrieved 21 January 2018. 
  36. ^ "'UNFAIRLY CHEAP' LIGHTNING NETWORK MAINNET HITS 40 NODES, 60 CHANNELS". Bitcoinist. 18 January 2018. Retrieved 21 January 2018. 

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