Ari Lewis is an investor at Grasshopper Capital, a cryptocurrency and asset fund. He writes about blockchain and investing in cryptocurrency. Ari lives in Long Island, NY and has a BS from Case Western Reserve University in Cleveland, OH.

A Primer on the Bitcoin Scaling Debate

This article was co-authored with Adam Collins. Follow him on Twitter @adc613

I was looking for an objective source of news on the Bitcoin scaling debate, but most articles I read seem to be biased for one solution or one group. I am hoping this piece gives you a neutral point of view on what is going on.

What is the current state of Bitcoin?
Bitcoin can process ~7 transactions per second (tps). PayPal handles 115 tps. While Visa handles on average 2,000 tps, but can go up ~4,000 at their daily peak and their network has the ability to handle 56,000 tps. If Bitcoin wants to compete at the level of scale of PayPal let alone Visa it needs to figure out a way to handle more than 7 tps. From a technical perspective, Bitcoin can theoretically scale to the level as Visa in terms of tps, but the solution most likely involves adjusting the block size. At the moment, Bitcoin blocks are only 1MB in size there’s about 1 new block every 10 minutes and each transaction is ~250 bytes. If you do the math this comes up to a maximum 7tps. If bitcoin were to up the block size to 2 MB they would theoretically double the number of tps that the network could handle.

So why not just increase the blocksize?
If you changed it to 572 MB then Bitcoin would be able to process 4,004 tps and compete with Visa if you increase the block size. The problem with increasing the block size is that it centralizes mining. All blocks have to be shared over the network and stored on a computer somewhere. The bigger the block size the more resources it takes up and the longer it takes to send over the network. If it takes too long to send a block over the network you're going to get more forking and computers with slow internet connections will be disproportionately harmed. This will centralized mining to miners with faster internet connections. Bitcoin’s security comes from its decentralized if you centralize power then you lose security. It’s widely accepted that increasing the block size will harm security, but what is debates is how secure does the network need to be. Is there a tangible difference between 99.9999999999999999999% and 99.999999999999999999%

What are the current solutions being proposed?
There are 2 solutions on the table

  • Segwit
  • Segwit + 2 MB

Segwit (short for segregated witness) rearranges the data stored in the block so that a 1MB block can store what use to take up to 3.7MB to store. Think about it like a suitcase. Typically when I pack, I just throw my clothes into the suitcase so I can only fit 5 shirts. However, when my mom packs, she neatly folds the shirts so she can fit 20.

Segwit + 2MB would adopt the Segwit solution I stated above, but would also increase the block size from 1MB to 2MB. If you combine the two solutions the block size essentially goes from 3.7MB on Segwit to 7.2MB on Segwit + 2MB.

What are the pros and cons of each solution?
At the moment, there are 3 “parties of Bitcoin”. You have developers, miners, and users. Users are individuals and businesses who transact with Bitcoin. Segwit is favored by most users because it will lower transaction fees and increase transaction speeds. Developers like it, because a higher tps and lower fees enable more applications such as micropayments. Miners aren’t in favor of it because it will lower their profits (since they make money off the fees). It’s important to understand that miners are critical to Bitcoin and despite them acting in their self-interest, they have spent a significant amount on mining infrastructure to ensure Bitcoin is running.

What’s going to happen next?
It’s important to remember that every party is invested in the network as a whole and if the value of the network goes up then everyone wins. The community has seemed to converge on adding Segwit with an eventual 2MB block increase assuming everything goes as planned. On August 1st it’s going to be up to the miners to activate Segwit. Segwit is a soft fork; which means if all miners don’t upgrade the network will still operate properly. However, it does require the majority of miners to implement. The Segwit soft fork goes beyond the scope of this article, but if you want to read more about it, check out Bitcoin Magazine.




 

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