Probably the biggest challenge that bitcoin faces today is scalability. Currently, bitcoin users are being charged an average of over $30 per transaction and transactions can take several hours to confirm. This is a far cry from the days when it was possible to send bitcoin within minutes to anywhere in the world for a few cents.
Due to how bitcoin is coded, the Bitcoin network can process a maximum of around seven transactions per second. Bitcoin hitting the mainstream has led to a massive influx of new users, which, in turn, has greatly slowed down the network — and a mempool of over 100,000 unconfirmed transactions at a time is no longer an uncommon sight.
Today the Bitcoin network simply cannot process transactions at the high speeds and low fees it used to — and for the time being at least there is no permanent solution in sight.
Not surprisingly, this has led to growing skepticism among some bitcoin investors about the future of bitcoin if its scalability issues are not addressed. After all, if bitcoin loses its utility as an international currency, is it really worth what it’s currently trading at?
Could an Altcoin replace Bitcoin?
While the Bitcoin network struggles to cope with transaction demand, the need remains for a decentralized digital currency for everyday purchases. As a result, there’s a reasonable chance that bitcoin could be replaced, in that role at least, by something more suited to the task. The four most likely candidates to replace bitcoin as the number one digital spending currency are bitcoin cash (BCH), litecoin (LTC), dash (DASH) and monero (XMR).
Bitcoin cash has all the functions of bitcoin with the added benefit of faster transaction times and much lower fees. Born as a result of a bitcoin fork in August last year, it benefits from piggybacking off bitcoin’s name and reputation and has strong financial backers intent on positioning the controversial altcoin as the “next” bitcoin. Despite this, bitcoin cash still has little merchant adoption and a very small ecosystem and is thus unlikely to replace bitcoin anytime soon.
Litecoin (LTC), on the other hand, has been around since 2011, when it was well-received by the bitcoin community as being the “digital silver” to bitcoin. Litecoin also has a reasonable degree of merchant adoption and offers faster transactions at much lower fees. Furthermore, the litecoin blockchain has activated SegWit to aid the cryptocurrency in scaling.
Dash (DASH) and monero (XMR) both have the added benefit of transactional privacy as well as high-speed transactions at low fees and are, therefore, serious competitors for the number one spot. Dash offers instant transactions with very small fees and also comes with a private send function.
While its cost-of-transaction is higher, Monero is widely considered as the most anonymous cryptocurrency with the best privacy-enhancing features. For bitcoin users who value financial sovereignty as well as transactional privacy, monero has emerged as the go-to currency. This is clearly reflected in its price performance over the past twelve months. Furthermore, the privacy-centric coin has also started to witness merchant adoption in recent months.
Proposed solutions for Bitcoin’s scalability
The two most prominent solutions that address bitcoin’s scalability challenges are Segregated Witness — more commonly known as SegWit — and the Lightning Network. SegWit is a blockchain upgrade that increases the ‘effective’ block size without actually increasing the block size. By removing signature data in each block SegWit allows more transactions to be processed. With the amount of data in each block reduced, speed increases and fees go down.
The SegWit upgrade to the Bitcoin blockchain was locked in on August 9, 2017, and was activated two weeks later. This was hailed a big win for bitcoin, and was reflected in its price in the weeks that followed. However, actual adoption of SegWit has been limited. Only a handful of wallet providers (Ledger and GreenAddress, for example) have enabled SegWit for their clients. Hence, the majority of bitcoin users are still faced with high transaction fees. Further, SegWit has been widely criticized as being only a temporary solution to bitcoin’s scalability issue.
This is where the Lightning Network comes in as a possible contender. In simple terms, the Lightning Network is an off-chain bitcoin payments channel network that allows Sender A to send bitcoin to Receiver B without the need for the entire Bitcoin network to validate and process the transaction. Instead, only the two involved parties need to sign the transaction for it to be completed.
The Lightning Network — originally proposed by Joseph Poon and Thaddeus Dryja in a whitepaper — has been in the works for over two years and has faced its fair share of criticism. While the Lightning Network still has to undergo several rounds of testing, its first real-world transaction was completed by software developer Alex Bosworth in mid-December when he topped up his phone with bitcoin using BitRefill’s service with zero fees.
The impact on Bitcoin of losing the currency race
Bitcoin was hailed in its early days as a truly international alternative currency that anyone with an Internet connection could use to store, send and receive money — as well as make purchases online. However, with fees skyrocketing, it is no longer a practical payment solution for things like a $20 mobile phone top-up or a $30 video game, as the fees for the transaction will exceed the purchase price.
That is why some believe that the bitcoin bubble is about to burst. What skeptics forget, though, is that bitcoin’s value proposition is not limited to being a borderless online currency. More recently it is bitcoin’s capacity to provide users with personal financial sovereignty that is once again capturing investor attention.
While bank accounts — especially nowadays — can arbitrarily be frozen for compliance reasons and online payment systems such as PayPal offer no better alternative in that regard, bitcoin provides users with the ability to have complete control of their wealth. Furthermore, due to bitcoin’s finite supply and slowing coin distribution, it possesses digital scarcity. With a capped supply and potentially unlimited demand the often referenced ‘digital gold’ is an increasingly more appropriate description than 'digital currency'.
Whether bitcoin will ever be usurped by another cryptocurrency as the largest by market capitalization remains to be seen. However, due to its unique features as a censorship-resistant store of value and as digital gold, it is well positioned to continue to gain in value in the years to come — even if that event does occur.