Yes! The scaling problem in bitcoin does exist and is growing exponentially with each passing day.
Its ability to process hundreds of thousands of transactions each day equivalent to $2 Billion worth is posing a huge backlog in the system.
When Satoshi Nakamoto first came up with the idea of bitcoin and released it as an open-source software back in 2009, there was no way of knowing thatbitcoin would grow into this massive phenomena that it is today.
Flash-forward to 2018,and even after almost a decade, bitcoin’s base code has remained almost entirely the same.
This in itself is not a bad thing; if something is not broken then there is no need to fix it after all. The problem is that, some of the limitations that the code had at its inception are still present in today’s iteration.
With this in mind and factoring the growing number of daily transactions, the current pool of users who number in the millions, then it becomes apparent how the scaling problem arises.
How does the scaling issue affect transactions?
With more transactions comes more burden on the network.
Or in this case, we need to increase the block size limit.
Let me back track for a minute. If you are reading this article, chances are that you are fairly familiar with the basic workings of bitcoin and the underlying mechanics.
In case not, here’s a very basic introduction to how it works. All the transactions ever made on the (bitcoin) network are recorded and stored on a public immutable ledger as with any other business. This ledger is known as “The Blockchain”.
The blockchain is a decentralized system that is serviced by a network of online nodes (that is miners all over the world running bitcoin software). To simplify it, whenever you do a transaction, the details of the transaction which include the sender, recipient and the number of bitcoins are broadcasted by these nodes to their copy of the ledger and thereafter updated on the blockchain.
Blockchain is a vast, global distributed ledger or database running on millions of devices and open to anyone… Trust is established through mass collaboration and clever code rather than by powerful intermediaries like governments and banks.Don Tapscott, Author of the Digital Economics, Wikinomics.
Approximately every six times in an hour, a collection of these transactions are encrypted and sealed forming what is known as a block. This block is then added at the end of the chain, effectively forming a chain of blocks also called a“blockchain”.
The old question ‘Is it in the database?’ will be replaced by ‘Is it on the blockchain?’
William Mougayar, Author of the Business Blockchain, Investor
I know, it feels like a rather unnecessarily complicated and runabout way of just recording something. But this is the elegance of bitcoin, because of the blockchain you have a secure and verifiable way of sending online currency.
A third party cannot cheat the network by introducing a new transaction or cloning the token. Cryptography ensures that never happens.
To get back to the scaling issue, in 2010, a limit of 1 megabyte was posed to a single block effectively creating what is now known as the block size limit.
Why you ask? This was done to introduce another layer of security.
See, if a third party tried to introduce a huge blockinto the system and broadcast them across the network, it would ultimately paralyze it.
This is also known as a DoS attack.
On the downside, this block size limit also had the adverse effect of throttling or bottle-necking the system.
Initially, it was not a problem when the network was in its infancy. The block size limit meant that three to seven transactions could occur every second but with the unexpected growth over the last few years this is not nearly sufficient for the current user base.
What are the effects of the block size limit today?
Average transaction times and fees are climbing through the roof.
On most days the transactions seem to occur seamlessly almost immediately, but as with most networks, there are days when there are so many transactions that the system reaches its peak.
These days, the waiting times for some transactions could vary from a few minutes to even a few days.
Although I have never encountered a waiting period of more than a few hours, the premium miner fee which I pay allows my transactions to be prioritized.
This creates a competing market oftransactional fees one has to pay in order for the transactions to go throughfaster.So we end up having users competing with each other by paying more.
It’s ironic that Bitcoin is starting to look more and more like the banks that they were trying to avoid in the first place.
So what are some of the solutions proposed?
Obviously as the network grew and it became more and more apparent that the scalability issue was going to be a serious one.
There were a couple of solutions being proposed.
Some of the more serious ones were BIP 101 and BIP 100. These were introduced back in 2015 by a group of bitcoin core developers. BIP stands for bitcoin improvement proposal.
BIP 101 was introduced by Garvin Andresen and was a simple solution- straight up increase the block size limit from 1mb to 8mb.
On the other hand BIP 100, introduced by Jeff Garzik wanted to leave the block size limit adjustable and dependent on the discretion of the miners.
Both of the proposals were hard-fork solutions meaning that if either had been implemented then it would have made the older versions of bitcoin software incompatible with the new network.
Both sounded like viable solutions but there was never an agreement to be had and so the system remained as it was.
“[Bitcoin] is a remarkable cryptographic achievement… The ability to create something which is not duplicable in the digital world has enormous value…Lot’s of people will build businesses on top of that.”
Eric Schmidt, Google Ceo
What’s the future for bitcoin in terms of scalability?
All is not lost however and in recent times this problem has become more and more pressing needing a dire solution sooner rather than later.
Once again, there are two solutions that have been proposed by the community.
How could Bitcoin Unlimited solve this crisis?
Bitcoin Unlimited or BU for short was the next logical step from the 2015 solutions. Since no one then could seem to settle on one solution on the block limit size, BU proposes to altogether abolish it.
This means that instead of setting a particular limit or capacity, the miners could create whichever arbitrary block size they wanted and send them out into the network while users could have the option to choose whichever block size they wanted and set that as their block size limit.
Users should … expect even more innovations to come with the new protocol. They should also expect new start-ups, services and products. George Basiladze. Ceo of cryptopay, on SegWit.
How could Segwit solve this crisis?
Segwit was initially intended to solve the issue of transaction malleability. This problem was caused when some of the transaction data in a given block were found to be missing. It also aimed to remove redundant data present in these same blocks.
This would effectively increase up to 4mb of space in the blocks, although some numbers would indicate about half of that.
Fixing the malleability issue also meant that the network would be safe enough to build another system to compliment it. The system proposed is called the Lightning Network.
Some people on the internet under appreciate how important [solving the problem of the] “malleability” aspect of Bitcoin is. [The problem] is one of the things that Segregated Witness upgrade is going to fix.Oleg Andreev, Software Designer
The Lightning Network works by moving bitcoin transactions to a separate payment channel which takes about ten minutes, afterwards all these transactions are conducted off the main network and processed relatively inexpensively and instantaneously by a third party.
On paper this sounds by a brilliant way of solving the scaling issue, however, one of the problems with this approach comes with the term “trusted third party”.
There are those within the community who feel like there is no difference between a third party and an entity such as the bank.
What does the future hold for bitcoin?
As you can see above, there are arguments both for and against the two solutions, however what is not immediately evident is that there are also underlying issues that are delaying progress.
One of these is that there is also a political struggle on either side, this is brought about by the fact that whoever wins this battle also gains an economic superiority over the other.
This, together with theories of affluent entities waging information wars on whoever gains control over bitcoin are just but a few hurdles that they have to overcome before any sensible progress can be made.
However, the situation is not entirely hopeless there has been progress made. In February 2016, several major mining companies and SegWit sat down in Hong Kong and reached an agreement to proceed on with the SegWit solution.