Bitcoin Challenges
Bitcoin has garnered much attention and controversy. It has experienced meteoric rises and tumultuous falls, capturing the imaginations of investors, technologists, and policymakers alike. However, its journey has been marked by numerous challenges, ranging from scalability issues to regulatory scrutiny. In this article, I delve into the multifaceted challenges that Bitcoin faces.
High Fees & Microtransactions’ Issues
Achieving transaction scalability with affordable fees presents a formidable challenge within the Bitcoin network. However, a potential remedy lies in the Bitcoin Lightning Network (BLN), an additional layer and autonomous blockchain integrated into the Bitcoin ecosystem. BLN enables Bitcoin to function as a Layer 2 blockchain network, facilitating swift and cost-effective retail transactions in bitcoin through the utilization of payment channels. Notably, BLN eliminates the necessity to record each transaction on the primary blockchain, thus streamlining operations. The congestion experienced on the Bitcoin network further exacerbates transaction fees.
Regulations & Tax issues
Bitcoin lacks inherent self-regulation mechanisms, leading to a landscape of fragmented and uncertain regulation. Each country adopts its unique approach, compounding the complexity. Classified as intangible property, Bitcoin is subject to capital gains taxes in many jurisdictions. El Salvador has notably recognized it as legal tender, contrasting sharply with China’s comprehensive ban on cryptocurrency trading and mining in 2021.
UX & UI
For those less technologically inclined, navigating the process of creating a wallet, safeguarding private keys, purchasing bitcoin from exchanges, and transferring them to wallets can prove challenging. The complexity and confusion stem from intricate user interfaces and user experiences.
High volatility
Many argue that Bitcoin fails to fulfill the function of a stable store of value due to its pronounced volatility. The cryptocurrency has experienced significant price fluctuations over the years, exemplified by notable declines such as the 58% loss in 2014 and the 73% drop in 2018. In November 2021, Bitcoin reached its peak price only to plummet to its lowest point a year later, losing over 75% of its value. As we approach the Bitcoin halving in April 2024, the cryptocurrency has once again surged to a new all-time high (ATH) in March 2024. While these fluctuations may entice traders, they render Bitcoin unsuitable for individuals susceptible to fear of missing out (FOMO) and impulsive selling as a means of preserving value.
Lack of built-in smart contracts
Despite Bitcoin’s dominance in market capitalization, some argue that other blockchains, notably Ethereum, surpass it due to their implementation of smart contracts. Additionally, Bitcoin transactions continue to lag behind those of traditional debit and credit cards in terms of speed. Stacks, a layer 2 blockchain technology network, has emerged as a potential solution to this challenge. By creating a sidechain of Bitcoin, Stacks introduces a layer of smart contracts that enable functionalities such as Bitcoin-based NFTs. Through Stacks bitcoins (sBTC), Bitcoin becomes fully programmable, paving the way for unlocking billions of dollars in decentralized finance (DeFi) applications built on the Bitcoin network.
Low speed
Bitcoin’s 1 MB block size limit restricts its transaction throughput to around 7 transactions per second (TPS), resulting in prolonged confirmation times. Addressing this challenge, the Bitcoin Lightning Network (BLN) emerges as a promising solution. BLN boasts the capability to process millions of transactions per second, offering a remarkable cost efficiency, estimated to be 1000 times cheaper than traditional payment processors like Mastercard and Visa. Its off-chain architecture enables banking networks to efficiently manage numerous transactions without burdening the main blockchain, thus enabling centralized banks to serve larger customer bases without compromising transaction speeds or encountering network congestion.
Rootstock (RSK) presents another avenue for addressing Bitcoin’s scalability limitations. RSK functions as a smart contract compatible, merged mining sidechain built on the Bitcoin network. With an initial throughput of 11 TPS, RSK has ambitious plans to scale to 20,000 TPS in the future. Furthermore, transaction confirmation times on RSK are significantly reduced to just 6 minutes, further enhancing the efficiency and usability of the Bitcoin ecosystem.
Low mainstream adoption & new technology
Traditional financial institutions, including banks, have historically exhibited reluctance in embracing Bitcoin and other cryptocurrencies, primarily due to a knowledge gap that exists within the industry. The availability and accessibility of Bitcoin infrastructure across Europe remain inconsistent, further contributing to this apprehension. Moreover, the financial sector tends to be more resistant to technological changes, compounded by the unpredictability and steep learning curve associated with blockchain technology, which hampers widespread adoption. Social perceptions of Bitcoin are often negative, with widespread associations with criminal activity perpetuated by media narratives influencing public opinion.
High Electricity Use & environment-related concerns
Bitcoin’s security and mining process necessitate significant investments in expensive hardware and substantial electricity consumption, raising concerns about its environmental impact. The carbon footprint of mining operations associated with Bitcoin may also be considerable.
Scalability, upgrades, forks & innovations
Processing delays are a common occurrence on the Bitcoin network, where one block is processed approximately every 10 minutes on the Bitcoin blockchain. Transactions are queued and prioritized based on the fees users pay, resulting in larger queues during periods of high transaction volume. Challenges arise when the network attempts to process numerous transactions simultaneously.
In addressing these challenges, the implementation of Segregated Witness (SegWit) in 2017 has proven beneficial. SegWit introduced significant improvements by enabling Bitcoin’s ordinal transactions and the creation of Bitcoin NFTs, achieved through a soft fork of the Bitcoin blockchain. Witness data, comprising the sender’s digital signature, is a crucial component. With the SegWit update, witness information is separated from transaction data and stored in a distinct data structure on the blockchain. Consequently, transactions no longer require inclusion of witness data, resulting in an increased block size for Bitcoin. This enhancement allows users to embed image and video data within the witness script, alongside digital signatures and other validation information, thereby expanding the capabilities of the Bitcoin network.
Double Spending, Attacks, Netwrok split
One of the inherent challenges within the Bitcoin network is the inability of the payee to reliably verify whether a coin has been double-spent by one of its owners. Proposed solutions to this issue often involve the introduction of a trusted central authority, or mint, tasked with validating transactions for double spending. However, this approach necessitates that each transaction be routed through the mint for verification, akin to traditional banking processes. The integrity of the entire monetary system hinges on the reliability of the mint operator, which introduces a single point of failure.
In the event of an attempted modification of a past block by an attacker, they must redo the Proof of Work (PoW) for the block in question and all subsequent blocks, aiming to surpass the cumulative work of honest nodes. Notably, the probability of a slower attacker successfully catching up diminishes exponentially as additional blocks are added to the chain.
In cases where two nodes simultaneously broadcast different versions of the next block, the Bitcoin network’s protocol dictates that nodes prioritize the longest chain as the correct one and continue extending it. However, if nodes receive conflicting versions of the next block, they may initially work on the version they received first while keeping the alternative branch in reserve. Resolution occurs when the next PoW is discovered, resulting in one branch becoming longer, at which point nodes switch to the longer chain.
By implementing network alerts to detect invalid blocks and prompting user software to download and confirm inconsistencies, the Bitcoin network can effectively thwart attackers. However, it remains vulnerable to threats when a majority of CPU power is controlled by colluding nodes, potentially leading to network instability and even fragmentation if miners disagree on protocol changes.
Conclusion
From scalability issues to environmental concerns and regulatory uncertainties, addressing these obstacles will be crucial for Bitcoin’s continued evolution and widespread adoption. However, with ongoing technological advancements and a growing community dedicated to innovation, the future of Bitcoin remains promising. As the cryptocurrency ecosystem matures, overcoming these challenges will pave the way for a more resilient and sustainable digital economy.
About Crypto Diva
I’m already in the Future… Meet me there! Blockchain Technology is my passion and I have dedicated my career and research path to DeFi. My ultimate goal is to encourage more female professionals in the DeFi industry.
As the Sales and Marketing Manager of coinIX , I’ve got the privilege of being in close contact with Blockchain investment firms, as well as the innovative web3 projects which are creating the foundations the future financial world. I love to make the impossible possible and i’m willing to go the extra mile for that. Be my companion in my DeFi journey and I’ll show you everything.
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