Bitcoins Coming Scalability Upgrades

Bitcoin’s most underrated feature could be that it is a strong foundation for a vast number of layers and functionalities. Whatever purposes we can dream up for the future of finance, having a trustless and secure global ledger underneath it all, and capable of using smart contracts, provides a platform for innovative products that couldn’t exist just a few short years ago.

Stock markets, Digital Rights Management, asset tracking, crypto-securities, Distributed Autonomous Corporations and many more financial innovations can ride the rails of the Bitcoin blockchain, and use its ledger as their own database. Better yet, it’s a database that is widely distributed, incredibly secure, and even auditable in real time. It’s no wonder why so many banks, businesses, and application developers are investigating the technology.

The blockchain as a payment platform, however, cannot cover the world’s commerce anytime in the near future. The Visa payment network is believed to do 45,000 peak transactions per second, and averages hundreds of millions per day. Bitcoin currently supports between 3 and 7 transactions per second, with a 1 megabyte block limit.

When the transaction per second limit is reached, which occasionally does happen, a backlog forms. As the Bitcoin network becomes more and more popular, within a range of different applications, this potential delay will become increasingly detrimental.

It’s not time to panic quite yet though. Upgrades to the Bitcoin software are in the works, and recent innovations build adding layers which provide increased transaction capabilities.

“The ‘layer 2’ services that are being built on top of the blockchain are absolutely necessary to get nearly instant real-time payments, micropayments and high volume machine-to-machine payments, to pick just three examples"
— – Gavin Andresen, Bitcoin Foundation Chief Scientist

Gavin Andresen is a vocal proponent of increasing the Block size, having tested a 20MB limit. Altering the Bitcoin Protocol requires a majority of the miners, who secure the network, to download the new software. Obtaining this majority consensus requires an ever increasing amount of co-operation. Without this agreement a bitcoin improvement proposal (BIP) can’t be imposed on the network, this process protects the network from malicious intent.

“if we increased the maximum block size to 20 megabytes tomorrow, and every single miner decided to start creating 20MB blocks and there was a sudden increase in the number of transactions on the network to fill up those blocks……. the 0.10.0 version of the reference implementation would run just fine.”
— – Andresen

Andresens proposal pails in comparison to his colleague Jeff Garziks proposed floating block size, with a 32GB upper limit. Agreement surrounding the increase appears to be reliant on a group of miners based in china. This group controls in excess of the 51% of mining power that is required for a consensus.

"After undergoing deep consideration and discussion, the five pools agree that while the block size does need to be increased, a compromise should be made to increase the network max block size to 8 megabytes. … We believe that this is a realistic short term adjustment that remains fair to all miners and node operators worldwide."
— – Chinese mining pool consortium

While the conversation around Bitcoins block size continues, other projects are tackling the problem, and possibly opening up completely new and disruptive avenues for blockchain technology.

Every transaction in bitcoins history is stored on the blockchain with the same level of irreversibility. This is expensive to maintain and may not be appropriate for low value or low-risk transactions.

The Lightning Network was put forward by independent developers Joseph Poon and Thaddeus Dryja in February. It fits nicely alongside the Bitcoin network, utilizing large numbers of low value transactions. These microtransactions are not individually recorded on the blockchain, but are backed by the bitcoin network, which could alleviate  the pressure on the block size.

Bitcoin micropayments are usually implemented by third party custodians, who hold coins, update user balances, and allow deposits and withdrawals. While many bitcoin services use this custodial model, The Lightning Network whitepaper claims it is possible to use native bitcoin transactions to scale to “billions of users.”

“The bitcoin protocol can encompass the global financial transaction volume in all electronic payment systems today, without a single custodial 3rd party holding funds or requiring participants to have any more than a computer on a home broadband connection.”
— -The Lightning Network whitepaper

Micropayment channels create a private relationship between two parties, who perpetually update their balances. The two counterparties can engage in trustless transactions as two cryptographic features, hashlock and timelock, prevent the theft of any funds. A near endless number of transactions can occur, with a final transaction recorded on the blockchain.

“Micropayment channels use real bitcoin transactions, only electing to defer the broadcast to the blockchain in such a way whereby both parties can guarantee their current balance on the blockchain; this is not a trusted overlay network, payments in micropayment channels are real bitcoin communicated and exchanged off-chain”
— -The Lightning Network whitepaper

General Bitcoin scalability could be achieved by using a large network of micropayment channels.

If the Lightning Network were to grow, and all Bitcoin users are participating by having at least one channel open on the Bitcoin blockchain, it is possible to create a near-infinite amount of transactions inside this network. The only transactions that are broadcast on the Bitcoin blockchain at this stage would be channels closing due to uncooperative counterparties.

“in the blockchain, if only two participants care about a transaction, it’s not necessary for all other nodes in the bitcoin network to know about that transaction. It is instead preferable to only have the bare minimum of information on the blockchain. It is desirable for two individuals to net out their relationship at a later date, rather than detailing every transaction on the blockchain.”
— -The Lightning Network whitepaper

There is a hurdle to overcome before the Lightning Network can be used. Once again, like the block size limit upgrade, the Lightning Network requires a Bitcoin Improvement Proposal to be agreed upon by the networks miners.

Making improvements to the Bitcoin protocol can be circumvented by creating an alternative blockchain. These alternative blockchains have been in use almost as long as Bitcoin, and can be applied to a range of applications. Alternatives to the Bitcoin Protocol have focused on inter bank payment networks, curing some of the world’s most devastating diseases, and offsetting  carbon emissions.

The overriding issue with alternative blockchains is the lack of integration with each other, and the original Bitcoin blockchain. The solution to this problem is integrating any and all blockchains, commonly referred to as the implementation of sidechains.

Late last year the team at BlockStream released a whitepaper outlining Elements, a technology “which enables bitcoins and other ledger assets to be transferred between multiple blockchains.”

“A larger block size would allow the network to support a higher transaction rate, at the cost of placing more work on validators – a centralisation risk”
— – Blockstreams whitepaper

The implementation of sidechains will give users access to new and innovative blockchain systems, using the assets they already own. By reusing Bitcoin’s currency, these systems can more easily interoperate with each other, and with Bitcoin. This solution can avoid the liquidity shortages and market fluctuations associated with new digital currencies.

“Bitcoin’s objective is relatively simple: it is a blockchain supporting the transfer of a single native digital asset, which is not redeemable for anything else. This allowed many simplifications in the implementation, but real-world demands are now challenging those simplifications.”
— – Blockstream Whitepaper

Sidechains also offer a much broader range of potential uses. Since they are separate systems, technical and economic innovation is not hindered.

“Bitcoin’s qualities and potential have encouraged widespread adoption and confidence. However, this necessarily implies a very conservative pace of development for security reasons, and this conservative pace of development means a conservative pace of innovation for Bitcoin as a whole.”
— – BlockStream

The potentially infinite number of sidechains that may arise in the future will eclipse the current transactions per second limit on bitcoins blockchain. By implementing a network of interoperable blockchains, we may well see large financial institutions, companies, and even governments running separate blockchains, all with custom features and their own limitations.