What is the Bitcoin Block Size Argument all about?

Scaling and the block size debate Explained with Highways

Winson Ng

The debate over the block size has embroiled the Bitcoin community for years.

At the heart of the debate are two conflicting beliefs about what the use case for Bitcoin should be. Those in favor of a bigger block size believe that it will spur Bitcoin adoption as currency.

Those who oppose a bigger block size argue that Bitcoin is best suited as a store of value, or a kind of ‘digital gold.’

What does a bigger block size mean and what would increasing the size do?

The original block size, was actually lowered by Satoshi Nakamoto from 32MB to 1MB as the maximum block size limit on July 15th, 2010.

Satoshi developed the block size limit in the beginning to prevent a “poisonous block” network denial-of-service (DOS) attack which allows a malicious miner to generate a giant block full of transactions for himself (because its inexpensive for him to do so) just to choke the network with lots of traffic.

It was a good idea back then and it still is today to completely remove the possibility of this kind of attack with a small maximum block size limit.

A larger block size, like Bitcoin Cash’s 8MB, allows each block to contain a little more data. The primary implication of this is that it would yield much smaller transaction fees, and would therefore be more suited as a day-to-day currency, a viable kind of digital cash.

They however didn’t stop with just 8MB blocks.

Bitcoin cash (BCH) recently implemented a fourfold increase in the maximum block size to 32MB in the latest fork. It is odd that they would further increase the block size when they are in fact only using around 60-90kB on a daily average according to BitInfoCharts.

One thing is certain, under this scaling strategy, the world’s largest miners will gain an edge. With bigger block sizes, more time is needed to mine new blocks, and in this industry, all it takes is the slightest advantage in order to gain a foothold in finding the next valid block.

And only the world’s largest mining pools and suppliers can get that extra advantage.

This leads to the centralization of mining, where big parties with big financial support would have the added advantage in resources and specialize hardware. With their superior hashing power; they can essentially find the next valid block much faster.

The concern with this is that in the end, these miners would gain too much influence and monopoly of the industry, and that isn’t what Satoshi intended when he envisioned Bitcoin.

Bitcoin’s main USP is decentralization. And Satoshi had to think adversarially in its design to give Bitcoin a fighting chance against governments, bankers and bad actors.

Being able to completely write-off the traditional banking system from the entire equation, is and has always been Bitcoin’s objective since 2008. Birthed from the financial crisis of 2007-2008.

The debate over block size has been highly contentious, and, at this point, a clear resolution remains elusive. In what follows, I will outline the arguments in favor and against a bigger block size. As well as consider the financial implications that the debate has, and continues to have, on the Bitcoin markets.

 

Bigger Block Size is Good?

The chief benefit of increasing the block size is that it would enable more transactions per second and lower transaction fees. At the time of this writing, the average transaction fee is about $1.70, but it has been as high as $35 following the steep bull run of December 2017.

If Bitcoin were to be used as a day-to-day currency it is imperative that transaction fees were as low as possible. Paying even a $1 fee on a $4 cup of coffee is nonviable and would offer little advantage over traditional payment methods like credit cards.

Many community members view the increase in block size as a temporary measure, to spur the use of Bitcoin as currency, as more sophisticated off-chain solutions are developed to increase the speed and efficiency of the network.

In other words, proponents of an increase in block size worry that the current level of transaction fees and confirmation times will impede adoption. They argue that it is a viable and necessary short-term fix until better solutions are fully developed.

Bitcoin software is complicated, and any attempt to explain it in so short a space oversimplifies the technology. I encourage you to delve deeper into existing research to fully understand just how revolutionary Nakamoto’s White Paper was by checking out this…

An increase in block size would also provide extra capacity for extensions of the Bitcoin protocol such as Mastercoin, which would act as an exchange point between Bitcoins and smart contracts created on the Mastercoin protocol.

The purpose of this extension would be to enhance Bitcoin’s decentralization and enhance it’s viability as a peer-to-peer currency.

Another extension that would benefit from an increased block size would be Counterparty. This extension would allow the execution of digital agreements, or Smart Contracts, on the Bitcoin blockchain, enabling Bitcoin to compete with its primary competitor, Ethereum, which already has this technological capability.

If it ain’t Broke, Don’t Fix it

Is this Satoshi’s Vision?

The core problem is that every transaction on the Bitcoin network has to be verified, and then stored by every participating node. As the transaction volume increases, the network load increases exponentially. And linear parameters, like increase the size of each block, will inevitably fail to keep pace with this exponential growth.

A block size increase would require a hard fork and code upgrade, as it did with the latest Bitcoin Cash fork.

In the short term this could sustain the Bitcoin network, transactions would be faster and fees lower. But, unfortunately, this is not a viable long-term solution.

As Bitcoin adoption increases, they would have to increase the size of the blockchain again and again in their orders of magnitude: 8MB -> 16MB -> 32MB -> 64MB -> 128MB -> 256MB -> 512MB -> 1024MB -> 2048MB -> 4096MB

Fast forward a few years into the future and the block sizes could theoretically increase up to 4GB.

At this point nodes in the network would need to validate this block, which is 4000x larger, at every 10 minute interval, resulting in 4TB of validation per week and over 200TB of data per year.

Ultimately this would incentivize the centralization of nodes, as most consumer-grade computers would not be able to keep up with the expanding block sizes.

Only specialized Bitcoin-mining firms, of which there are already many, would have the resources to run a successful node.

The concern is, that this would lead to a system not dissimilar from the traditional banking system – a development which would be antithetical to the decentralized spirit of cryptocurrency.

In other words, larger blocks would mean that it would be harder to incorporate a sufficient number of independent verifying nodes. Losing these nodes would put the Bitcoin network at risk of losing its core properties: an independent, decentralized and distributed currency.

A larger block size would also have regulatory ramifications.

In its current more decentralized state Bitcoin is protected from government intervention largely because it’s network is lightweight and nodes are widely dispersed.

Nodes in the network can contribute to the consensus process even if they are low-end machines with relatively little bandwidth. If block size was increased, the Bitcoin mining farms that would be necessary to maintain the network, would be a much easier target for government regulation.

If clearly defined business entities became more dominant in the consensus process than they already are, it would be simple for governments to regulate them, because the target of these regulations would be all the more identifiable.

For instance, governmental regulatory bodies could enact laws that regulated Internet Service Providers from allowing nodes to participate in the network.

This risk is exacerbated by the view, of many regulatory bodies like the World Economic Forum, that Bitcoin is simply a means to launder money, evade taxes, fund terrorism and facilitate cybercrime.

For these reasons, it would be wiser to keep the Bitcoin network distributed and decentralized. Any nodes contain any risky or experimental software developments or upgrades to secondary layers which, if they fail or were to shut down for any reasons at all would not compromise the entire Bitcoin network.

Increasing the block size could also be a slippery slope. Although doubling the capacity of each block would likely be technically feasible, it’s possible that centralized mining operations may continue to advocate increases in block size until it would be too large for lesser nodes to participate.

In addition, modifying the underlying Bitcoin protocol, a necessary component of increase block size, could also disrupt the stability and reliability of the network.

There are already solutions in development that do not modify the block size. One solution is a modification in the code called Segregated Witness (SegWit). This solution separates the digital signatures, used to verify transactions, from transaction data itself.

The result is that the network can effectively create blocks larger than 1MB, but still consider them below the cap. The other advantage of SegWit is that it patches a network vulnerability called transaction malleability and allows for the implementation of the “lightning network.”

The lightning network allows Bitcoin holders and merchants to open secure and trustless payment channels.

Once a channel is created, funds can be transferred between the two parties without being written directly to the blockchain. The lightning network would occasionally need to “anchor” to the main blockchain, but, overall, would enable an enormous increase in transaction capacity with very little change in block size.

This proposed solution would not prevent users from using Bitcoin as they had before and would still allow transaction to be conducted directly over the core blockchain.

Until more off-chain solutions are fully implemented, the market has already seemed accept the inevitability that Bitcoin’s true value is as “digital gold,” and that other currencies, like Dash and Litecoin, will fulfill the role of a medium of exchange for micropayments.

As a store of value, Bitcoin is unrivaled. It has the most robust and tested network and an element of scarcity (only 21 million coins will ever be minted). Over time, transaction volumes show that people are willing to pay higher fees to shift around larger amounts of funds.

Conclusion

Although it may appear to be an appealing short-term solution, increasing the block size is a misguided approach to solving the scaling and fee issues. Off-chain solutions like SegWit and Lightning Network would provide many of the same benefits and would not come at the cost of further centralization of the Bitcoin mining process.

Bitcoin is not simply a system of peer-to-peer digital cash. Networks like this evolve over time.

How does it evolve?

It evolves based on each of our own interactions with the network.

30 years ago, Tim Berners-Lee designed the web to be a mechanism for physicists to be able to exchange knowledge, data and images between research institutions.

Did he ever imagine it would be used to post photos of us taking selfies to impress everyone in the world? No.

Unintended consequences are part of technology, and technology is a tool.

Each and everyone of us uses this tool , and each time we interact with it, it changes its nature to better suit our needs.

It gets molded by our collective use over a long period of time.

The Bitcoin Network reflects on the collective action & wisdom of all participants Globally, and it simply does not care for one of our own opinions.

In other words, a network like this does not care for someone’s vision for it, even if its Steve Jobs or Elon Musk.

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