Bitcoin and other blockchain-based coins mirror a monetary infrastructure by establishing decentralized grounds for executing transactions on the blockchain. The general public may not understand the underlying mechanisms behind blockchain technology, but it can perfectly sense the perks of decentralization that come with it.
Statistics suggest that there are is an increasing number of crypto holders on a global scale, which is enough for creating an alternate payment system where you can pay for a restaurant order in bitcoins, for example. However, people who invest in crypto either keep them as a store of value or use them as dynamic financial instruments on professional trading platforms.
The main obstacle in Bitcoin’s way to creating a peer-to-peer cash system, not a gold or derivatives system, is the scalability issue — the inability to process transactions in a given timespan irrespective of the growing number of network users.
In this article, we’ll discuss the scalability flaws from the perspective of the basic Bitcoin traits considering all possible solutions for future improvements.
How Does Bitcoin Work?
Bitcoin is the original digital currency that uses the blockchain, also known as distributed ledger technology (DLT), as a foundation for creating, transferring and storing all circulating coins. All these stages in Bitcoin’s life span are synchronized in a single process called Bitcoin mining.
The blockchain is a public ledger that doesn’t allow interference from a centralized authority to control the transaction flow. On that account, it applies automated mechanisms to ensure safe and valid transaction processing. The Bitcoin blockchain uses the Proof-of-Work (PoW) consensus mechanism, with the SHA-256 algorithm as an underlying technology behind the mining process. The source code of this technology doesn’t allow any modification of the Bitcoin transaction once it’s sent to validators and accommodated in a block for further transaction processing.
In PoW-run blockchains, all network participants or miners need to validate the legitimacy of a transaction to be immutably recorded on the blockchain ledger. More specifically, the Bitcoin transaction goes through three layers of verification: the sender, the miners, and the recipient.
The Bitcoin Transaction
We’ll walk you through the path bitcoins take when travelling from one owner to another. That’s the best way to understand that scalability problems lie at the core of Bitcoin mechanisms. At the same time, these mechanisms are the only method to avoid double-spending and other forms of manipulation in the blockchain realm.
- Once you select the “Send” option on your crypto wallet, the pending transaction is broadcasted to the computers (nodes) of all network participants.
- At this point, they start competing for verifying the transaction first, or what we call Bitcoin mining. The competition consists of re-converting an SHA-256 function, which is applied to the transaction data after its broadcast on the network. The process itself isn’t difficult for miners but requires huge amounts of computational power.
- The winning node adds the block to the blockchain and receives newly-minted bitcoins as a reward.
- Each new block of transactions is copied in real-time to the blockchain version that is downloaded and distributed to all miners across the world, thus creating consensus in terms of the current state of the Bitcoin network.
How Many Transactions Per Second (TPS) Can Bitcoin Process?
A Bitcoin transaction can take from a few minutes to a few hours or even days — with an average block time of 10 minutes.
The most crucial factor determining the speed of a single BTC transaction is the network congestion — the number of pending transactions at the time of sending. For example, in April 2018, the Bitcoin network took 8 minutes to confirm a transaction, but in July 2021, the average transaction time was over 20 minutes.
The problem is that the Bitcoin block size is limited to 1MB (1,048,576 bytes) even though with the SegWit improvement (more on this in the next section), it can technically contain transactions in the total size of 4MB. For the most part, a single block can accommodate around 500 transactions, with an approximate size of 380.04 bytes. In other words, Bitcoin processes only 4.6 transactions per second (TPS), which means that a new block is added to the blockchain within this time interval.
These numbers signal a slow network, making the Bitcoin blockchain unsuitable to serve as a payment service to 300 million users. To illustrate, the VISA card you use on a daily basis handles up to 1,700 transactions per second.
Moreover, Bitcoin’s capacity for processing transactions ranks poorly among other cryptocurrencies. This is how the original crypto compares with its competitors:
|Ethereum (ETH)||12-15 (the upgraded ETH 2.0 version is estimated to improve the transaction speed to up to 100,000 TPS after the transition to Proof-of-Stake)|
The Bitcoin’s Scalability Issue
The Bitcoin scalability issue originates from the basic principles of its blockchain, which means that there is no one-off solution to increase the blockchain performance.
Technically, developers need to change two parameters in the Bitcoin open-source code in an attempt to provide an optimal environment for sleek transactions: either to increase the block size or to adjust the block generation time, which is conditioned by the complexity of the SHA-256 equation.
Unfortunately, even if developers somehow manage to implement a workable plan for changing the Bitcoin hard code without compromising the transaction security, there is an external factor that can’t be modified: the relay time (TR) — a parameter through which we measure the broadcast time a single block needs to get to all active nodes on the Bitcoin blockchain.
The website BitNodes shows that there are over 15,000 reachable Bitcoin nodes. Based on the parameters, The Karlsruhe Institute of Technology has calculated the block propagation time in 2019, which shows that it needs a little less than 14 seconds for a new block to get broadcasted to 99% of the nodes.
Finally, the scalability flaws have always been a source of dispute among developers and a direct result of numerous hard forks that arose from the Bitcoin source code. The most notable was the launch of Bitcoin Cash (BCH), which appeared as a response to a fierce disagreement among blockchain developers. The BCH creator was determined to raise the level of the blockchain scalability but didn’t have enough support to modify the Bitcoin “constitution” code. So, Roger Ver designed a blockchain project with an extended block size from 1 to 8 MB.
Solutions for the Scalability Issue
Up until now, the Bitcoin community of developers has presented two workable scalability solutions for softening the poor performance — Lightning Network and the SegWit wallet address format, which reduces the transaction size, and hence, allows a bigger number of transactions “occupants”.
The Lightning Network
The Lightning Network (LN) is a second layer integrated into the Bitcoin blockchain that enables transactions outside the network. These off-chain channels are powered by smart contracts allowing users much faster and cheaper transactions. In comparison to the mainnet processing time of 10 minutes, the Lightning Network handles transactions almost instantly after the channel is established between two or more users, thus creating a multidimensional network.
The process of setting up a Lighting address is pretty straightforward and doesn’t differ much from creating a regular Bitcoin wallet. However, to activate a payment channel, the user has to lock a predefined amount of bitcoins into the network. This upgraded method is suitable for small day-to-day transactions, like paying for a chocolate bar at a crypto-friendly retailer. In that case, the channel will be established between you as a customer and the merchant.
In addition, users have the flexibility to close their active channel and settle their balances on the core network. The thing is that only the first and the last transaction is logged on the core network, which is how the Lighting Network achieves optimal time efficiency.
The first Lightning Network transaction was executed back in 2017, and since then, it has achieved considerable success among active bitcoiners, with over 100,000 estimated users, according to Arcane Research. Yet, this network is still facing teething problems related to security scams and transaction lag.
The SegWit Format
The SegWit (segregated witness) appeared in 2015, earlier than the Lighting Network, as a feasible plan for a more flexible blockchain. Interestingly, the first Segwit transaction was “tested” on Litecoin, even though it was clearly envisioned to improve Bitcoins’ scalability.
In a nutshell, the SegWit layer lowers the transaction weight in the containing block by segregating a transaction into two parts (sender and recipient’s addresses) and removing the witness data (signature). Thus, the SegWit transaction becomes smaller in size leaving room for a larger number of transactions in a single block.
Remember that not all crypto exchanges and wallets support SegWit clients’ addresses but keep to the original Legacy format instead.
A Few Words Before You Go…
Reading numbers won’t give you the real picture of Bitcoin’s poor scalability. However, through comparison with centralized money transmitters, you can conclude the sad truth that Bitcoin is far from becoming the desirable cash system we were promised.
Hopefully, developers will find a way to reduce the waiting times on the blockchain network, but until then, make sure you buy BTC on some of the most reputable crypto exchanges in Canada and HODL them safely in an independent digital wallet.