Bitcoin’s Scalability Bottleneck: An Exploration into High Bitcoin Transfer Fees and Settlement Time
One of Bitcoin’s original advantages was almost instantaneous transfer of value for a very low cost. Due to the structure of the bitcoin distributed ledger, transfer fees of bitcoin have become particularly excessive and transaction times have increased for lower transaction fees. In order for payments to be processed, transaction fees which pass through the bitcoin blockchain are increased to entice miners to process the transaction. For example, one reddit user paying 33% transfer fee for one bitcoin transaction, or it can take days or weeks in order for transfers to be processed with a low transaction fee. Currently 157,000 unconfirmed transactions are in the queue to be passed through the bitcoin network.
The main cause of this problem, known as the Bitcoin Scalability Problem, is the popularity of bitcoin and the limit of 1MB per block size which limits transactions on the bitcoin network to between 3 and 7 transactions per second. A larger problem caused by this issue involves adoption and use of the entire bitcoin ecosystem because it severely limits micro-transactions and increases transaction cost for larger transactions.
Mining with bitcoin involves significant computational resources and is energy intensive due to the competitive nature of the technology. A recent Reddit article even goes as far as to suggest that miners are ‘money laundering’ for sellers given the negative return on hash rate processing power.
Current solutions to the excessive transfer cost and slow transaction time of bitcoin include the Lightning Network , ‘Segregated Witness’ or SegWit and Bitcoin Cash.
About Segregated Witness
SegWit involves removing certain data, the ‘Witness’, from each transaction in order to reduce the size of each transaction without requiring a Hard Fork, potentially doubling the number of transactions per block. A good guide to using SegWit is available here.
About Lightning Network
The Lightning Network is an ‘off-chain’ solution to Bitcoin’s current bandwidth problem, and describes itself as a checking account with the original bitcoin blockchain being a savings account.
The Lightning Network essentially operates by limiting the amount of information sent to the bitcoin blockchain with a starting balance, and then uses a separate network to confirm and maintain transactions, essentially creating a similar blockchain ledger to bitcoin. ‘Nodes’ perform a similar function to bitcoin miners and are rewarded in a similar manner.
My personal belief on the Lightning Network is that it is not an appropriate solution because, in many ways, this solution is merely re-inventing the wheel of bitcoin and creating an ‘off-site’ solution that does not actually solve the problem.
About Bitcoin Cash
Bitcoin Cash was created by a Hard Fork in August 2017, and solves the scalability problem by increasing the block-size limit to 8 MB which allows increased transactions per block without an off-chain solution (like Lightning Network). The price of Bitcoin Cash is only around $2000 per BCH and is mostly rejected by the ‘Bitcoin Core’.
Other Alt-Coin Solutions
After seeing the challenge of bitcoin scalability, various alt-coins have solved it in various ways, such as Ethereum and Ripple, which was specifically created to solve the problem of scalability.
In Conlusion, the scalability of bitcoin problem of high fees and long settlement times is a very serious obstacle to the utility and adoption of Bitcoin as a store and transfer of value. Ultimately, lower transaction fees for micro transactions and faster settlement time will increase the utility and value of Bitcoin. Current solutions such as Segregated Witness and the Lightning network offer solutions to this issue relating to bitcoin, and other cryptocurrencies such as Ripple are specifically created with this issue in mind. In the future I believe the best solution is a hybrid of solutions, where Bitcoin transactions are processed in a way similar to Lightning Network, but utilizing an existing cryptocurrency network such as the Ethereum Network, reducing duplication of computer networks/blockchains while ensuring network security, reliability and verification.