Bitcoin Scalability: A Beginner’s Guide to Scaling Bitcoin
May 25, 2023
The vision behind Bitcoin is that of an open monetary network that provides fast peer-to-peer payments at a low cost. However, Bitcoin scalability issues current still stand in the way of making this goal a reality.
In this article, we take a look at what these issues are and what possible solutions might look like.
What is the Bitcoin Scalability Problem?
Bitcoin is the most secure blockchain network by far, allowing users to transact directly without the need for intermediaries. The protocol is also decentralized, permissionless, and transparent.
These are all unique and, thus, excellent attributes. However, they do come with a trade-off. Because of its high decentralization as well as security, the Bitcoin blockchain falls short on scalability.
When it comes to transaction throughput, Bitcoin’s base layer blockchain is currently able to manage 1 to 5.5 transactions per second. From a mass adoption perspective, these numbers are very low and present a barrier for Bitcoin to achieve widespread adoption and become global money for the 8 billion people in the world.
For this reason, the Bitcoin network needs to scale up.
But before we can explore possible scaling solutions, it’s important to understand the factors that determine the speed of the Bitcoin blockchain: It’s the block size, as well as the block time, that is relevant.
Satoshi Nakamoto introduced a 1MB block size limit to the code in 2010 as an afterthought when he realized that a greater block size could open up the network to DoS attacks and spamming. The block size cap also prevented the blockchain from growing too fast to the point that would make it hard for nodes to download it because a lot of disk space would be needed early on.
Nakamoto made this decision knowing that the block size limit would affect scalability – he chose security and decentralization over scalability. This challenge of having to choose one element over the other has come to be known as the blockchain trilemma. As it is nearly impossible to achieve optimal levels of all three elements, every blockchain is forced to prioritize two of these three features.
The block size cap has caused one of the greatest debates within the Bitcoin community, causing divides and, consequently, hard forks. Thanks to additional updates on Bitcoin’s base layer blockchain, its block size limit could be alternatively lifted.
Additional features were implemented in 2017 through the SegWit upgrade, making it possible to attach more data to a single Bitcoin block – up to 4MB, to be exact. Still, the average block size has remained below 1.5MB until recently, when the Ordinals project launched Bitcoin-native NFTs in early 2023.
Block time, the duration it takes to create a block, is another factor that affects the speed of Bitcoin transactions. A blockchain that takes a short time to create a block means it can process transactions faster. At approximately 10 minutes, Bitcoin’s block time is high compared to other blockchains, such as Litecoin and Ripple.,.
It is due to Bitcoin’s block size and block time that the network, solely through its base layer blockchain, cannot compete with traditional payment services like Visa and PayPal, which process approximately 1.700 transactions and an average of 193 transactions per second, respectively.
Furthermore, because of the limited block size, Bitcoin transaction costs can increase with high demand, pricing out lower-fee transactions. As a result, users may be forced to pay more for miners to prioritize their transactions, impeding the Bitcoin network from gaining widespread adoption.
How Will Bitcoin Solve Its Scalability Issue?
Scalability is key for Bitcoin to compete and potentially even surpass the likes of Visa and PayPal. Upgrading the layer-1 blockchain and building layer-2 networks on top of the main chain is the solution.
Bitcoin developers are continuously working on making the network more efficient and have successfully implemented the SegWit and Taproot upgrades. While SegWit enables a block to carry data up to 4 MB, Taproot makes the storage of transactions in a block more efficient. However, these upgrades haven’t had a large impact on network speed since the transaction confirmation time hasn’t decreased, while the block size has also mostly remained below 1.5 MB.
Therefore, layer-1 upgrades may not be the most impactful solutions since they are still limited by the blockchain trilemma. For instance, increasing the block size can significantly impact network security. Moreover, larger blocks demand larger disk space, which is expensive and makes it harder for full nodes to keep a full copy of the Bitcoin blockchain, potentially leading to centralization since only the nodes that can afford a lot of disk space will be left to secure the network.
As a result, layer-2 scaling solutions are more popular because they’re more impactful. They “off-load” transactions from the main chain to improve efficiency. Bitcoin layer-2 solutions like the Lightning Network or the Liquid Network attempt to scale Bitcoin by improving the speed of transactions as well as the scope of what is possible with Bitcoin.
Examples of Bitcoin Scalability Solutions
The Lightning Network (LN) is a layer-2 scaling solution proposed in a 2016 whitepaper. It facilitates high-volume instant micropayments at low fees using smart contracts and payment channels. LN is reportedly capable of handling billions of transactions per second.
LN allows two parties to send BTC to a multi-signature channel Bitcoin address, generally referred to as a payment channel. This requires an on-chain Bitcoin transaction. To spend the funds in the channel, the two parties must approve the new balance, but no on-chain transactions are necessary. Once their transactional relationship is over, they can close the channel. Once they close the channel to take the funds held therein back onto the Bitcoin blockchain, only then another on-chain transaction is needed.
the beauty of LN is that once payment channels are open, transactions can be conducted without touching the Bitcoin base layer blockchain. Additionally, LN doesn’t use counterparties; instead, it uses smart contracts.
To open an LN payment channel, a Lightning Network wallet like Breeze, Zap, Muun, Blue, or Electrum is needed.
Liquid Network is a creation of Blockstream, launched in 2018. It enables the fast settlement of confidential Bitcoin transactions and the issuance of digital assets.
To use the network for fast transactions, users must peg into the Liquid Network by depositing bitcoin. In return, they receive Liquid bitcoin (L-BTC), backed on a ratio of 1:1 by bitcoin. Bitcoin moved to the Liquid Network is settled within two minutes. To peg out, users send a request for their BTC to be released. Participating members on the network then perform the peg out by converting L-BTC to BTC. The user gets their BTC after two Liquid confirmations.
Liquid Network is governed by a federation of members consisting of crypto exchanges, Bitcoin companies, and financial institutions. The federation has three boards– technology, membership, and oversight– each with five members and a separate set of responsibilities. The federation votes annually for the members to sit on these boards.
Wallets that allow anyone to access the Liquid Network include Green, Elements Core, SideSwap, and Marina.
Rollups are layer-2 scaling solutions that take transactions off-chain for processing. They then batch the transactions and submit them to the main chain as a single piece of data. This reduces the burden of the main chain, allowing it to be more efficient. Rollups could be zero-knowledge, optimistic, or sovereign.
Zero-knowledge (ZK) rollups use zero-knowledge proofs proving off-chain transactions are correct without disclosing any details. Optimistic rollups, on the other hand, don’t submit validity proofs because they are “optimistic” and assume off-chain transactions are correct. Both ZK and optimistic rollups are managed by smart contracts, but sovereign rollups aren’t.
Will Bitcoin Scale?
It is very likely that Bitcoin will eventually scale, particularly with the implementation of layer-2 solutions, as opposed to layer-1 scaling. The Lightning Network alone has improved scalability, with the total value of BTC held in payment channels rising steadily over the years, indicating that more and more people are using it. At the time of writing, LN channels held a sum value of 5,542.83 BTC.
Layer-1 scaling, on the other hand, won’t be the way to go. While some improvements can be made at the margin by making a few minor alterations to the code over time, it will be upon layer-2 scaling solutions to provide the heavy lifting regarding Bitcoin scaling.
What does it mean to scale a blockchain?
Scaling a blockchain means increasing its capacity to process more transactions per second. Improving transaction throughput is typically the most difficult type of scaling to achieve, especially at the base layer, since it could compromise decentralization and security.
However, layer-2 scaling solutions are becoming more popular because they allow layer-1 blockchains to scale more easily while remaining focused on security and decentralization. Layer-2 networks are built on top of the main chain and work in different ways to make the base layer more efficient.
Does Bitcoin have scalability?
Today, Bitcoin is mainly scalable through layer-2 solutions like the Lightning Network and the Liquid Network. It has also been made slightly more scalable through minor improvements to its code.
However, a lot still needs to be done to make Bitcoin scalable for the masses. Still, the Bitcoin developer community does not want to rush things as Bitcoin’s founder has already prioritized security and decentralization over scaling. Thus, achieving scalability is a long-term process with Bitcoin.
How can side chains help to solve the scalability problem of Bitcoin?
Generally, sidechains are independent blockchains connected to the main chain by a two-way bridge. They have their own consensus algorithm and design for attaining decentralization and security.
Sidechains can help with scalability since they take the load off the main chain by processing transactions off-chain. The bridge facilitates the movement of assets between the two chains. While sidechains are potential scalability solutions for Bitcoin, they are also faced with the blockchain trilemma. That means they may trade off security and decentralization for scalability.