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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 not recognized by the longer chain). A blockchain can also be purposely forked when developers change rules in the software used to determine which transactions are valid.[8]

Hard forkEdit

Per CoinDesk, a hard fork is a change of rules that allows to create new blocks not considered valid by the older software.[8]

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.[9] 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.[10][11]

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.[8] A soft fork can also split the network when non-upgraded software creates blocks not considered valid by the new rules.[12]

Segregated Witness is an example of a soft fork proposal. Blockstream co-founder and developer Pieter Wuille proposed Segregated Witness in December 2015.[13] Segregated Witness (SegWit) is an update aimed at solving transaction malleability, a known quirk in the bitcoin software.[14] 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).[14][not in citation given] Second, by solving transaction malleability, CoinTelegraph supposes SegWit to allow new second-layer solutions on top of bitcoin.[14][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 (BIP stands for Bitcoin Improvement Proposal) by Jeff Garzik and BIP 101 by Gavin Andresen were introduced.[2] In mid 2015, some corporations were supporting a block size limit to as high as eight megabyte.[15]

  • Bitcoin XT was proposed in 2015 to increase the transaction processing capacity of bitcoin by increasing the block size limit.[16]
  • Bitcoin Classic was proposed in 2016 to increase the transaction processing capacity of bitcoin by increasing the block size limit.[17]
  • 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.[18]
  • 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.[19] 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'.[19] 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.[20]
  • 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.[21]

Activated scaling proposalsEdit

Segregated WitnessEdit

In May 2017 Digital Currency Group announced it had offered a proposal, referred to as SegWit2x ("the New York Agreement"),[22] 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 alleged support in excess of 80% of the total bitcoin hash rate.[23] In June 2017 the Segregated Witness proposal was further complicated with claims that it might violate patents filed with the USIPO.[24] As of mid-2017 the proposal had support in excess of 90% of the hashrate, however the proposal was also been controversial in that work on the project is limited to an invitation only group of developers.[22] In mid-July 2017 it became apparent that miners supported implementation of Segwit2x before the 1 August 2017 UASF, thereby attempting to avoid the risk of a hard fork for the bitcoin network.[25][26][27] On 21 July, BIP 91 locked-in, meaning that the controversial 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 implemented until 21 August at the earliest, after which miners would begin rejecting blocks that do not support SegWit.[28] On 24 August 2017 (at Block 481,824) Segregated Witness went live.[29]

Segregated witness:

  • Changes how data is stored in each bitcoin block.[29]
  • Provides a boost in transaction capacity while remaining compatible with earlier versions of bitcoin software.[29]
  • Fixes transaction malleability that has been a roadblock for other bitcoin projects.[29]
  • Implementation of the Lightning Network has become feasible.[30]

Bitcoin CashEdit

Bitcoin Cash, a hard fork of the bitcoin blockchain was born at on 1 August 2017 (since block 478559).[31][32] After the hard fork, bitcoin holders owned equal amounts of both bitcoin (BTC) and Bitcoin Cash (BCH).[33] Bitcoin Cash increased block size from one megabyte to eight megabytes, without incorporating SegWit.[34] By the evening of 1 August 2017, BCH had the third highest market capitalization of any cryptocurrency (after BTC and Ethereum).[35] Many cryptocurrency exchanges suspended service for the days surrounding 1 August 2017.[36][37][38][39] 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.[40]

See alsoEdit

ReferencesEdit

  1. ^ Hayes, Adam (18 October 2016). "The Three Major Bitcoin Protocols Explained". Investopedia. Retrieved 18 January 2017. 
  2. ^ a b Andrew Marshall (2 March 2017). "Bitcoin Scaling Problem, Explained". The Coin Telegraph. Retrieved 4 July 2017. 
  3. ^ Andreas M. Antonopoulos (April 2014). Mastering Bitcoin. Unlocking Digital Crypto-Currencies. O'Reilly Media. ISBN 978-1-4493-7404-4. 
  4. ^ Jordan Pearson (14 October 2016). "‘Bitcoin Unlimited’ Hopes to Save Bitcoin from Itself". Motherboard. Vice Media LLC. Retrieved 17 January 2017. 
  5. ^ 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. 
  6. ^ a b Hertig, Alyssa (21 July 2017). "BIP 91 Locks In: What This Means for Bitcoin and Why It's Not Scaled Yet". CoinDesk. Retrieved 21 July 2017. 
  7. ^ "What Could Happen to Bitcoin? A Visual Guide to Scaling Outcomes". CoinDesk. 18 July 2017. Retrieved 24 July 2017. 
  8. ^ a b c d Amy Castor (27 March 2017). "A Short Guide to Bitcoin Forks". CoinDesk. Retrieved 1 July 2017. 
  9. ^ Alyssa Hertig (24 May 2017). "Keep Calm and Bitcoin On? Developers Aren't Worrying About a Fork". CoinDesk. Retrieved 1 July 2017. 
  10. ^ Adinolfi, Joseph. "Exclusive: Grayscale launches digital-currency fund backed by Silver Lake’s co-founder Hutchins". MarketWatch. Retrieved 27 April 2017. 
  11. ^ Wirdum, Aaron van. "Rejecting Today’s Hard Fork, the Ethereum Classic Project Continues on the Original Chain: Here's Why". Bitcoin Magazine. Retrieved 27 April 2017. 
  12. ^ "Soft Fork". investopedia.com. Investopedia. Retrieved 21 July 2017. 
  13. ^ Corin Faife (5 January 2017). "Will 2017 Bring an End to Bitcoin's Great Scaling Debate?". CoinDesk. Retrieved 4 July 2017. 
  14. ^ a b c Andrew Marshall (20 April 2017). "SegWit, Explained". CoinTelegraph. Retrieved 1 July 2017. 
  15. ^ Evander Smart (19 October 2016). "‘Why is My Bitcoin Transaction Taking So Long?’ Here’s Why". The Coin Telegraph. Retrieved 4 July 2017. 
  16. ^ Alex Hern. "Bitcoin's forked: chief scientist launches alternative proposal for the currency". the Guardian. Retrieved 20 August 2015. 
  17. ^ Rizzo, Pete (19 January 2016). "Making Sense of Bitcoin's Divisive Block Size Debate". CoinDesk. Retrieved 22 June 2017. 
  18. ^ Pete Rizzo & Alyssa Hertig (24 May 2017). "Bitcoin's New Scaling 'Agreement': The Reaction". CoinDesk. Retrieved 29 June 2017. 
  19. ^ a b Alyssa Hertig (14 May 2017). "CoinDesk Explainer: The Bitcoin Unlimited Debate". CoinDesk. Retrieved 29 June 2017. 
  20. ^ Pete Rizzo (20 March 2017). "CoinDesk Explainer: Bitcoin Unlimited: Mining Power Should Determine Hard Fork". CoinDesk. Retrieved 2 July 2017. 
  21. ^ Alyssa Hertig (8 June 2017). "Bitcoin's 'Independence Day': Could Users Tip the Scales in the Scaling Debate?". CoinDesk. Retrieved 29 June 2017. 
  22. ^ a b Alyssa Hertig (23 June 2017). "Top Secret? Bitcoin Scaling Plan Segwit2x Leaves More Questions Than Answers". CoinDesk. Retrieved 29 June 2017. 
  23. ^ "Leading bitcoin ecosystem participants reach consensus on scaling issue". Econo Times. Econo Times. 25 May 2017. Retrieved 23 June 2017. 
  24. ^ "Segregated Witness and the Possibility of Patent Infringement". Nigeria Times. Nigeria Times. 3 June 2017. Retrieved 23 June 2017. 
  25. ^ CNBC (14 July 2017). "Dispute could mean financial panic in bitcoin". Associated Press. Retrieved 19 July 2017. 
  26. ^ Suberg, William (18 July 2017). "Suddenly, Bitcoin Hard Fork Looks Unlikely As Chinese Exchange Readies For SegWit". COINTELEGRAPH. Retrieved 18 July 2017. 
  27. ^ Castor, Amy (18 July 2017). "CoinDesk Explainer: How BIP 91 Enacts SegWit While Avoiding a Bitcoin Split". CoinDesk. Retrieved 18 July 2017. 
  28. ^ Hertig, Alyssa (8 August 2017). "It's Official: Segregated Witness Will Activate on Bitcoin". CoinDesk. Retrieved 9 August 2017. 
  29. ^ a b c d Hertig, Alyssa (23 August 2017). "SegWit Goes Live: Why Bitcoin's Big Upgrade Is a Blockchain Game-Changer". CoinDesk. Retrieved 23 August 2017. 
  30. ^ van Wirdum, Aaron (23 August 2017). "Segregated Witness Activates on Bitcoin: This is What to Expect". Bitcoin Magazine. Retrieved 24 August 2017. 
  31. ^ Coleman, Lester (25 July 2017). "Bitmain Clarifies Its ‘Bitcoin Cash’ Fork Position". CryptoCoinsNews. Retrieved 27 July 2017. 
  32. ^ Popper, Nathaniel (25 July 2017). "Some Bitcoin Backers Are Defecting to Create a Rival Currency". The New York Times. Retrieved 28 July 2017. 
  33. ^ Song, Jimmy (24 July 2017). "Bitcoin Cash: What You Need to Know". MEDIUM. Retrieved 28 July 2017. 
  34. ^ Norrie, Adam (29 July 2017). "Bitcoin Cash: Another Fork in the Road for Bitcoin". CryptoCoinsNews. Retrieved 29 July 2017. 
  35. ^ Pollock, Darryn (2 August 2017). "Bitcoin Cash Third-Biggest Cryptocurrency On First Day of Creation". COINTELEGRAPH. Retrieved 2 August 2017. 
  36. ^ "Gatecoin Service Preparation for the UASF and MAHF on 1 August 2017". Gatecoin. 28 July 2017. Retrieved 28 July 2017. 
  37. ^ Helms, Kevin (18 July 2017). "13 Japanese Exchanges Agree to Suspend Bitcoin Service on August 1". BITCOIN.COM. Retrieved 27 July 2017. 
  38. ^ "Our plans to handle potential BTC network disruptions". POLONIEX. 24 July 2017. Retrieved 27 July 2017. 
  39. ^ "Bitcoin Hard Fork: Our Position". Bitstamp. 27 July 2017. Retrieved 27 July 2017. 
  40. ^ Saunders, Laura (25 August 2017). "No One Knows How Much to Pay in Bitcoin Cash Taxes". The Wall Street Journal. Retrieved 25 August 2017. 

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