The Bitcoin blockchain represents the database of all Bitcoin accounts and transactions. When people send or receive bitcoins, accounts in the database are updated. Each update occurs via the addition of a new block of transaction data to the chain of previous records, hence the name blockchain. You can think of Bitcoin’s blockchain as an open, decentralized, and distributed ledger.
Blockchain technology allows Bitcoin to operate as a decentralized digital currency. It is thanks to blockchain that Bitcoin and other altcoins like Ethereum can be used in safe transactions without a supervising third party such as a bank. Instead, users themselves protect the system by downloading and broadcasting copies of the blockchain in order to prevent fraud. However, as Bitcoin transactions increase in number, so does the size of Bitcoin’s blockchain.
The growing size of the blockchain is a concern for many Bitcoin users. If the blockchain grows too big, it could become very hard for individual users to store and broadcast the entire blockchain which can harm the decentralized nature of Bitcoin.
Blockchain Technology: a Decentralized Distributed Ledger
The blockchain is a database containing all previous Bitcoin transaction records. The ledger grows in size as new Bitcoin transactions are validated and new blocks are added to the chain.
On Bitcoin’s blockchain, all of these records are public and decentralized. This means that the work of adding, validating, and updating data to the blockchain is accomplished on the peer-to-peer Bitcoin network by the users themselves.
All Bitcoin users can run software called Bitcoin Core on their devices that allows them to take part in this system, something that is known as running a Bitcoin node. These nodes keep a copy of the blockchain and cross-reference the history of all Bitcoin transactions. This is how they prevent the manipulation of records. They can also validate new transactions and add new blocks to the blockchain in a process called mining.
Blockchain Protocols
Bitcoin’s blockchain operates on certain protocols in order to assure the security of data flow. These protocols can be understood as a series of rules that allow Bitcoin transactions to flow smoothly and securely.
The Bitcoin blockchain uses a consensus mechanism called Proof of Work (PoW) in order to add new blocks to the ledger. PoW protocol consists of complex algorithms users have to run on their devices in order to generate a matching hash to the one generated by the system. The miners who successfully generate the necessary hash have the “proof” of their “work” i.e running the algorithms. They get to validate the new transactions and add a new block to the chain.
The Proof of Work protocol is designed to ensure the pace of creating new blocks at the steady pace of one block per 10 minutes on average. When the computational power in the network increases, the difficulty of performing the Proof of Work protocol also increases to keep the pace steady.
Normally, this would mean that Bitcoin users would have to wait 10 minutes on average to have their transactions approved in the blockchain. Unfortunately, it gets more complicated. Another rule of the Bitcoin blockchain is the block size limitation. For years, Bitcoin block size was capped at 1 megabyte. In 2017, Segregated Witness (SegWit) protocol upgrade allowed the upper limit to approach 4 Megabytes but most blocks are still closer to 1MB.
The Cryptocurrency Scalability Problem
The combination of the PoW and SegWit protocols allows for a limited amount of transaction data to be validated and added to the blockchain at any given time. This creates a lot of backlogging, with a lot of transactions waiting to be approved as the number of Bitcoin transactions increases.
Miners usually choose transactions with higher fees to make a block because they get to keep the fee as well as some new BTC generated by the system as a reward. But as the number of transactions increases so does the average transaction fee.
This is a pretty big problem for Bitcoin users because transaction fees could potentially cost more than the actual transactions and waiting a long time for the validation could make purchasing a coffee with BTC pretty awkward. While there is an expectation that it will get easier and more practical to use BTC in our daily lives as it becomes more mainstream, this may not be true because of the scalability bottleneck. For comparison, electronic funds transfer companies like Visa can process 65,000 transactions per second while Bitcoin processes only seven.
You may be wondering whether these protocols can be adjusted by the Bitcoin network so that everything runs more smoothly. While it is possible to adjust these protocols in certain ways, such as increasing the block size limit or reducing the difficulty of PoW, such changes have to be approved by the majority of the Bitcoin network. Also, changing these protocols is not a sustainable solution in the long term and could create many other problems that could endanger Bitcoin.
Scalability Solutions
It was Satoshi Nakamoto, the inventor of Bitcoin, who decided that each block in the Bitcoin blockchain would be 1MB at most. The limit functions as a safety measure against spamming since it is easier for the nodes in the system to verify 1 MB blocks rather than constantly having to reject gigabytes worth of spam and false information. This system worked well in the early years of Bitcoin, however, by 2017, the lagging speed of transaction verifications pushed the Bitcoin community to make changes to the existing Bitcoin rules.
The nature of these changes was hotly debated. One suggested solution to the problem was to increase the block size limit or remove it completely. Supporters of this idea eventually broke from the Bitcoin blockchain and created a separate blockchain called Bitcoin Cash. This was an upgrade that is not compatible with the existing Bitcoin protocol and required splitting the network, a move that is known as a hard fork. Other users who were not content with the splitting stayed with the original Bitcoin blockchain.
Still, even those who remained with Bitcoin ended up increasing the block size limit after a while, using a soft fork, i.e. an update on the existing blockchain. The new protocol update was compatible with the existing system so no new splits happened. The Segregated Witness (SegWit) upgrade replaced the 1 MB size limit with a block weight limit. Since then, each block has a theoretical limit of 4 megabytes and a more realistic limit of 2 megabytes.
Why Do We Need Block Limits?
The 1MB block limit established by Satoshi Nakamoto is no longer used, either in the Bitcoin network or its split-offs. But why fight over it if both camps ended up doing the same thing? And why not do it again and speed up validating transactions so that we can all order our coffees in peace? Well, to answer that question we need to go back to Bitcoin and blockchain basics.
Bitcoin is a decentralized digital currency. The only way it can function without third-party control is through the marvelous peer-two-peer network of record-keeping technology called blockchain. This system requires users to download and then keep broadcasting the contents of the blockchain in order to verify transactions. Without block size limits, enormous blocks of data could be added to the blockchain which would increase its size exponentially. But the bigger the total blockchain is, the harder it is to work with the blockchain.
In such a case, for the majority of individual Bitcoin users in the network, it would become impossible to keep up with the astronomic costs of storage and bandwidth necessary to full nodes. Few hundred gigabytes are manageable for most users but removing the block limit may cause the blockchain size to jump to terabytes or even petabytes. This can spell the end of decentralization for Bitcoin, as then only those with huge resources would be able to work with the Bitcoin blockchain.
What Is the Lightning Network?
Bitcoin enthusiasts are working on several possible solutions to the Bitcoin blockchain scalability problem. There are many solutions in development that will not affect Bitcoin’s existing protocols directly. These are called layer two solutions which are basically protocols that can interact with the Bitcoin blockchain to make life easier for Bitcoin users.
The Lightning Network is the most widely adopted layer two solution to the growing problems of the Bitcoin blockchain. It is a protocol that allows users to make instant transactions that are only inscribed to the blockchain after the transactions are completed. On top of that, there are no fees for using the Lightning Network which is a huge plus for many Bitcoin users.
A Few Words Before You Go…
The Bitcoin blockchain has grown exponentially in the past decade and as Bitcoin becomes more mainstream, it will no doubt continue to grow even more. It remains to be seen how the Bitcoin community will manage to enable proper scaling as more users join the Bitcoin network. Both the SegWit upgrade and the Lightning Network managed to take some of the pressure off the blockchain and there are more layer two solutions under development so that more Bitcoin transactions are possible without compromising the decentralized nature of the cryptocurrency.