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Bitcoin scalability problem

Number of transactions per month
Unspent bitcoin transactions outputs

The bitcoin scalability problem is a consequence of the fact that blocks in the blockchain are limited to one megabyte in size.[1] Blocks larger than one megabyte are automatically rejected by the network as invalid.[2] Bitcoin blocks carry the transactions on the bitcoin network since the last block has been created.[3]:ch. 2 This allows for around three transactions per second maximum capacity rate.

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.[4] 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."[5]

On 21 July 2017 bitcoin miners locked-in a software upgrade referred to as Bitcoin Improvement Proposal (BIP) 91, meaning that the controversial Segregated Witness upgrade will activate at block 477,120[6] with the associated block size increase to two megabytes occurring three months later in November.[7]

Contents

ForksEdit

A fork referring to a blockchain is what happens when a blockchain splits into two paths 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.[8]

Hard forkEdit

As per CoinDesk, a hard fork is a change of rules that allows to create new blocks not considered valid by the older software.[8] As per Investopedia, a hard fork term refers to a situation when a blockchain splits into two separate chains in consequence of the use of two distinct sets of rules trying to govern the system.[9]

Bitcoin XT and Bitcoin Classic both proposed a block size limit parameter increase called a "hard fork" by Core contributor Eric Lombrozo as a method to improve scalability, however support for both proposals fell over time.[10] Bitcoin Unlimited also proposes to adjust a block size limit, which may result in a hard fork.[5]

A hard fork can split a network if all the network participants don't follow the fork. For example, Ethereum Classic came into existence as a result of the hard fork of the Ethereum network, which was a response to the DAO hack.[11][12]

Soft forkEdit

Per CoinDesk, in contrast to a hard fork, a soft fork is a change of rules that creates blocks recognized as valid by the old software.[8] Per Investopedia, a soft fork can also split the network when non-upgraded software creates blocks not considered valid by the new rules.[13]

Segregated Witness is an example of a soft fork proposal. Blockstream co-founder and developer Pieter Wuille proposed Segregated Witness in December 2015.[14] Segregated Witness (SegWit) is an update aimed at solving transaction malleability, a known quirk in the bitcoin software.[15] 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. First, CoinTelegraph predicts it to expand capacity in the range of about two megabytes immediately after SegWit’s activation (compared to bitcoin's current one megabyte capacity).[15][not in citation given] Second, by solving transaction malleability, CoinTelegraph supposes SegWit to allow new second-layer solutions on top of bitcoin.[15][not in citation given]

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.[8]

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.[2] By mid 2015, some developers were supporting a block size limit to as high as eight megabytes.[16]

  • Bitcoin XT was proposed in 2015 to increase the transaction processing capacity of bitcoin by increasing the block size limit.[17]
  • Bitcoin Classic was proposed in 2016 to increase the transaction processing capacity of bitcoin by increasing the block size limit.[18]
  • In 2016 an agreement of some miners and developers colloquially termed "The Hong Kong Agreement" was made that contained a timetable that would see both the activation of the Segregated Witness (SegWit) proposal made in December 2015 by Bitcoin Core developers, and the development of a block size limit increase to 2 MB. However, both timelines were missed.[19]
  • 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.[20] 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'.[20] 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.[21]
  • BIP148 is 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.[22] It became unnecessary because miners opted to vote for SegWit activation using the BIP91 scheme.

Activated scaling proposalsEdit

Segregated WitnessEdit

Segregated witness:

  • Changes how data is stored in each bitcoin block.[23]
  • Provides a boost in transaction capacity while remaining compatible with earlier versions of bitcoin software.[23]
  • Fixes transaction malleability that has been a roadblock for other bitcoin projects.[23]
  • Implementation of the Lightning Network has become feasible.[24]

ActivationEdit

In May 2017 Digital Currency Group (not to be confused with the Digital Currency Initiative of the MIT Media Lab) announced it had offered a proposal, referred to as SegWit2x ("the New York Agreement"),[25] activating Segregated Witness at an 80% threshold of the total bitcoin hashrate, signaling at bit 4; and activating a 2 MB block size limit within six months with support in excess of 80% of the total bitcoin hash rate.[26] In June 2017 the Segregated Witness proposal was further complicated with claims that it might violate patents filed with the USIPO.[27] As of mid-2017 the SegWit2x proposal had support in excess of 90% of the hashrate, however the SegWit2x proposal has been controversial in that work on the project is limited to an invitation only group of developers.[25] In mid-July 2017 it became apparent that miners supported implementation of the Segwit part of the agreement before the 1 August 2017 UASF, thereby attempting to avoid the risk of a hard fork for the bitcoin network.[28][29][30] On 21 July, BIP 91 locked-in, meaning that Segregated Witness upgrade would activate at block 477,120.[6] By 8 August another milestone was reached when 100% of the bitcoin mining pools signaled support for SegWit, although SegWit would not be fully activated until 21 August at the earliest, after which miners would begin rejecting blocks that do not support SegWit.[31] On 24 August 2017 (at Block 481,824) Segregated Witness went live.[23][not in citation given] Most bitcoin transactions have not been using the upgrade, but they have not been able to since the BIP 173 address format standardization had not been completed. In the first week of October the proportion of bitcoin transactions using SegWit rose from 7% to 10%.[32]

Bitcoin CashEdit

Bitcoin Cash, a hard fork of the bitcoin blockchain was born at on 1 August 2017 (since block 478559).[33][34] After the hard fork, bitcoin holders owned equal amounts of both bitcoin (BTC) and Bitcoin Cash (BCH).[35] Bitcoin Cash increased block size from one megabyte to eight megabytes, without incorporating SegWit.[36] By the evening of 1 August 2017, BCH had the third highest market capitalization of any cryptocurrency (after BTC and Ethereum).[37] Many cryptocurrency exchanges suspended service for the days surrounding 1 August 2017.[38][39][40][41] Americans wondering whether their acquisition of Bitcoin Cash is taxable as income, or not taxable, as a division of property have received no guidance from the Internal Revenue Service.[42]

Other scaling proposalsEdit

SegWit2xEdit

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.[43] The second half of SegWit2x involves a hard fork in November 2017 to increase the blocksize to 2 megabytes.[44]

SegWit has been authored by a people not involved with SegWit2x, and many of them are opposed to SegWit2x.[45]

The SegWit2X hard fork is even more controversial than was the Bitcoin Cash hard fork.[46] Some companies that originally supported the New York Agreement have backed-out of supporting the proposal, including F2Pool, Bitwala, SurBTC, and Wayniloans.[47][48][49] The hard fork in November could result in another bitcoin blockchain in addition to the second blockchain created in August.[50] The cryptocurrency exchanges Bitfinex, HitBTC, and CEX.io have declared that the original chain will be "BTC", and the new two megabyte chain will be "B2X", whereas the position of Bitstamp, bitFlyer, Kracken, and other exchanges has not been formally announced.[51] Several signatories to the New York Agreement (including Coinbase, Blockchain, and Xapo) have indicated that they will not decide which chain is to be called "bitcoin" until after the hard fork.[52]

A major issue of contention is the choice of SegWit2x developers to implement opt-in replay protection, rather than the strong replay protection implemented by the bitcoin cash hard fork.[53] Opt-in replay protection means that the Segwit2x chain will still accept transactions intended for the original chain, in addition to replay protected transactions only valid on Segwit2x. Users sending transactions on the original bitcoin chain, or who fail to send replay protected Segwit2x transactions, will both be vulnerable to having their transactions replayed to the other chain. This may result in accidental loss of funds. This absence of strong replay protection has created considerable controversy in the bitcoin community.[54]

Greg Maxwell, a prominent Bitcoin Core contributor and Blockstream employee has claimed that a previous agreement to increase the block size had been made under duress.[55] Implementation of SegWit2x will increase transaction fees to miners and reduce transaction fees Blockstream makes on sidechains — as well as increase the power of miners while reducing the power of core developers.[56] Some SegWit2x supporters are eager to minimize the perceived power of Bitcoin Core developers over bitcoin protocol development, whereas some opponents do not want to see more power concentrated in the hands of fewer miners.[57]

On November 8, 2017 the developers of SegWit2x announced that the hard fork planned for around November 16, 2017 has been canceled for the time being due to a lack of sufficient consensus.[58][59] In the wake of the failure of plans for the hard fork to double the bitcoin block size, Bitcoin Classic, which was begun in 2016 to solve the bitcoin scalability problem, ceased operation, declaring that Bitcoin Cash is now the only hope for bitcoin to become scalable.[60] Although there was a substantial bitcoin sell-off (and a substantial rally of bitcoin cash) after the news, bitcoin prices recovered, reportedly based on bitcoin as a store of value, even if bitcoin has a scalability problem as a medium of exchange.[61]

Lightning NetworkEdit

The Lightning Network is an in-development project that aims to fix the bitcoin scalability problem by scaling "off-chain". It aims to allow for a microchannel state update without any blockchain usage (in the usual non-adversarial case), making micropayments realistic (and fee-less). Lightning Network will require putting a funding transaction on the blockchain to open a channel.[62] As of 16 November 2017, the Lightning Network is in alpha.

See alsoEdit

ReferencesEdit

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External linksEdit