Bitcoin scalability problem
The bitcoin scalability problem is a consequence of the fact that blocks in the blockchain are limited to one megabyte in size. Blocks larger than one megabyte are automatically rejected by the network as invalid. Bitcoin blocks carry the transactions on the bitcoin network since the last block has been created.: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. 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."
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 with the associated block size increase to two megabytes occurring three months later in November.
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.
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. Bitcoin Unlimited also proposes to adjust a block size limit, which may result in a hard fork.
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.
In contrast to a hard fork, a soft fork is a change of rules that creates blocks recognized as valid by the old software. A soft fork can also split the network when non-upgraded software creates blocks not considered valid by the new rules.
Segregated Witness is an example of a soft fork proposal. Blockstream co-founder and developer Pieter Wuille proposed Segregated Witness in December 2015. Segregated Witness (SegWit) is an update aimed at solving transaction malleability, a known quirk in the bitcoin software. 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).[not in citation given] Second, by solving transaction malleability, CoinTelegraph supposes SegWit to allow new second-layer solutions on top of bitcoin.[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.
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. In mid 2015, some corporations were supporting a block size limit to as high as eight megabyte.
- Bitcoin XT was proposed in 2015 to increase the transaction processing capacity of bitcoin by increasing the block size limit.
- Bitcoin Classic was proposed in 2016 to increase the transaction processing capacity of bitcoin by increasing the block size limit.
- 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.
- 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. 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'. 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.
- 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.
Activated scaling proposalsEdit
In May 2017 Digital Currency Group announced it had offered a proposal, referred to as SegWit2x ("the New York Agreement"), 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. In June 2017 the Segregated Witness proposal was further complicated with claims that it might violate patents filed with the USIPO. 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. 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. On 21 July, BIP 91 locked-in, meaning that the controversial Segregated Witness upgrade would activate at block 477,120. 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. On 24 August 2017 (at Block 481,824) Segregated Witness went live.
- Changes how data is stored in each bitcoin block.
- Provides a boost in transaction capacity while remaining compatible with earlier versions of bitcoin software.
- Fixes transaction malleability that has been a roadblock for other bitcoin projects.
- Implementation of the Lightning Network has become feasible.
Bitcoin Cash, a hard fork of the bitcoin blockchain was born at on 1 August 2017 (since block 478559). After the hard fork, bitcoin holders owned equal amounts of both bitcoin (BTC) and Bitcoin Cash (BCH). Bitcoin Cash increased block size from one megabyte to eight megabytes, without incorporating SegWit. By the evening of 1 August 2017, BCH had the third highest market capitalization of any cryptocurrency (after BTC and Ethereum). Many cryptocurrency exchanges suspended service for the days surrounding 1 August 2017. 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.
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