If you want to try yourself at cryptocurrency investment, you have to take into consideration numerous important factors before you dive into the cryptocurrency market.
Some of the most important factors you need to conduct research on before you even think of investing in crypto are the currencies’ use cases and target market, their security features, performance, and transaction throughput, the coin supply, and the type of consensus method employed.
The cryptocurrency performance and the transaction throughput, i.e. the number of processed transactions per second (TPS), always go hand in hand. In this article, we’ll explain these factors in more detail, using Bitcoin’s blockchain and TPS as an example.
We’ll also use Bitcoin’s blockchain to talk about the main reasons for the low number of Bitcoin transactions per second and some of the approaches taken to solve this scalability problem.
What Does Transactions Per Second (TPS) Mean?
In the domain of blockchain technology—the technology that all the cryptocurrencies are based on—the term transaction per second refers to the number of transactions that a cryptocurrency network is able to process every second.
Every cryptocurrency blockchain is capable to process a different number of transactions per second, for example:
- Bitcoin (BTC) has a transaction throughput of 7 TPS, and the confirmation time for one transaction is approximately one hour;
- Ethereum (ETH) has a transaction throughput of 15-25 TPS, while its confirmation time is approximately six minutes;
- Litecoin (LTC) has a transaction throughput of 56 TPS, with a confirmation time of approximately half an hour;
- Bitcoin Cash (BCH) has a transaction throughput of 250 TPS, while its confirmation time is approximately one hour.
As you can see from our examples above, Bitcoin has one of the lowest TPS values. Compared to Bitcoin, centralized exchanges are capable of making thousands of transactions every second. Just take a look at payment systems like VISA and PayPal who can obtain approximately 2,000 and 4,000 TPS respectively.
However, the Bitcoin network cannot use the same algorithms that VISA uses due to the fact that they’re centralized, while Bitcoin’s blockchain still maintains a high degree of decentralization. Changing this would end up being costly in regard to both the performance and the security of Bitcoin, which is why we need better solutions for the asset’s scalability.
The Blockchain Scalability Problem
So far, we know that Bitcoin isn’t scalable enough, meaning that the Bitcoin network has limited capacity when it comes to handling a large amount of transaction data in a short period of time. Put like this, the problem is in the block size.
Bitcoin blocks carry the transactions on the Bitcoin network. The capacity of the on-chain transaction process, i.e. the creation of a new block is approximately ten minutes and the maximum block size has been limited to 1 MB by the Bitcoin developer(s) Satoshi Nakamoto. The block size limit, in correlation with the Proof-of-Work (PoW) difficulty adjustment settings of Bitcoins’ consensus protocol, slows the confirmation speed down and creates a bottleneck in the transaction processing capacity of Bitcoin. The result of this can be increased transaction fees and delays in processing of transactions which can’t fit into a block.
Nowadays, there are a few solutions for Bitcoin’s scalability problem, but we can say that neither of them solves the issue altogether. These solutions can be divided into on-chain and off-chain scalability solutions.
Bitcoin Cash (BCH) is a hard fork of Bitcoin, and it was primarily created as an alternative with a bigger block size for faster Bitcoin transactions.
Originally, the on-chain solution made the block size of Bitcoin Cash eight times larger, meaning that it jumped from 1 MB of non-SegWit Bitcoin blocks to 8 MB, and later on 32 MB per block. This means that there can be more Bitcoin transactions in one block and that the blockchain itself is larger.
Unfortunately, Bitcoin Cash is only a temporary solution because its TPS is still lower than the global TPS that payment systems like VISA and PayPal have. Despite its larger block size, Bitcoin Cash still processes only 250 TPS and the confirmation time is approximately one hour per transaction.
Segregated Witness Transactions
Segregated witness, aka SegWit, is an update in Bitcoin’s protocol, and it was pushed through in a soft fork of the original Bitcoin blockchain. It was developed for improving the transaction throughput on the blockchain network, first implemented by Litecoin.
What SegWit does is decrease the transaction size of the block on the blockchain by dividing the transaction into two parts, which increases the number of transactions that can be included in a block with the same size.
In the first section of the transaction are the receivers’ and the senders’ wallet addresses, and in the other section is the so-called witness data which consists of the transaction signature. SegWit reduces the transaction size by removing the witness data from the main block, which frees up space for other transactions.
However, SegWit still doesn’t fill up all the gaps in Bitcoin’s scaling problem, but only solves them partially.
The Lightning Network
The Lightning Network was developed in 2015 as an off-chain solution for Bitcoin’s scalability problem, and simply put, it allows you to take your bitcoins off the blockchain and transfer them privately to another user from the Bitcoin community. So, how does the Lightning Network work?
The Lightning Network uses Bitcoin’s scripting language which enables basic smart contract features. Here, you have to create a payment channel, which requires an initial on-chain transaction of funds that will be used as a deposit for further payments. Afterward, all Bitcoin transactions on the payment channel that are in the range of the deposit will be made off-chain.
The downside of this solution is that this is the only off-chain solution available for Bitcoin and Bitcoin Core-based blockchains, such as Litecoin, Bitcoin Cash, Dogecoin, and Digibyte. Another disadvantage of the Lightning Network is that you have an extra initial cost, due to the fact that in order to establish a payment channel, you have to deposit some funds.
On the other hand, this solution has some upsides too. For one thing, the transactions are fast, as they’re processed through the network almost immediately, which allows a throughput of millions of TPS. Secondly, there are no additional transaction fees because there are no miners to perform proof-of-work and get paid.
A Few Words Before You Go…
Hopefully, now you have a better understanding of the number of Bitcoin transactions per second in comparison to other payment systems like VISA and Paypal. We’ve gone over the main reason for the low number of transactions per second in Bitcoin and the challenge that the programmers are facing before they can solve Bitcoin’s scaling problem. As you may have realized, there are no perfect solutions, only partial ones, but we hope that in the near future Bitcoin’s scaling problem will get fully resolved.