Bitcoin Scaling Debate
Explain Like I’m 5 Years Old.
By Michael Dunworth
So if you’re coming to read this, it’s most likely because you’ve been hearing a lot about “Bitcoin fork” “Blocksize Increase” “Hard Fork” “Mining Threshold” “Bitcoin is dead” “Bitcoin is about to break” etc…
The purpose of this article is to help you understand the broad strokes of the discussion and give you a solid starting point to dive deeper with your own research.
I’ve written it in very casual language because hopefully that’s simpler to digest.
Background On The Bitcoin Blockchain (Example purposes)
- In the Bitcoin protocol, which is a blockchain, these blocks are essentially clumps of transactions that all get put together and archived/confirmed into the network.
- Imagine a block being just like an excel spreadsheet tab… With 1000 rows. If you get to 1000 rows, in order to keep recording transactions, you’ve got to open a new tab that’s got another 1000 rows. This is just like new blocks in the blockchain. The blocks are the new tabs in the excel file.
- Bitcoin network can process ~7 transactions per second
- Bitcoin network is popular, so people are sending >7 transactions per second.
- Transactions get backlogged when everyone is looking to use the network (whether for practical reasons, or people spamming lot’s of meaningless little transactions to fill those rows in the spreadsheet and force others to not get their transaction in a block).
- In order to make sure your transaction doesn’t get backlogged you increase your “miners fee” (Most default to 0.0004 every transaction with bitcoin, ~$0.35c).
- This basically is the equivalent of tapping the bitcoin miner on the shoulder (the people who verify your transaction/essentially delivering to your counter-party) and saying “Hey! If you can let my transaction through before everyone, I’ll pay you a little bit extra for it.”
Increasing the miners fee means that it’s the beginning of the end of the dream of “Sending one bajillion dollars for 5 cents”.
- Coinbase no longer is paying the miners fee for their customers, because it’s gotten high (like 10c per transaction to make it go through in a timely manner).
- Bitpay is now no longer paying the miners fees on small transactions because it’s not profitable for them to do so.
Two proposals to solve this have emerged…
- Segregated Witness/Lightning Network — This is taking a different approach where it’s detaching from relying on the size of each block to throttle the amount of transactions that can be processed on the network. Friendly explainer here to read later for you, but keep reading so you don’t lose the gist of it all :)
- Blocksize increase — This doesn’t really need much explanation, it’s effectively doubling the size of capacity in the software. (Like in the example at the start, it’s like allowing 2000 rows per tab on our spreadsheet)
Why is this a big worry to people?
- One of the big dreams of Bitcoin is decentralization. If you raise the blocksize to 2MB, you make it harder for people that aren’t big miners to run a “node” on the network (that’s just a way of saying “helping” the network process transactions).
- The harder to become a node on the network, the more we rely on the big miners to do everything (which they’ve been doing very well thus far). However, is it putting too much power in the hands of a few large enterprises (big mining co’s in China) that could then potentially abuse this power and control the network?
- This causes everyone to panic, but the thing is as to why it’s possibly going to actually happen (increase block size) is because all the big miners in China and around the world benefit a lot more when the blocksize is increased, compared to the other solution.
Could you give me a real life example to help me wrap my head around it?
Let’s say we’re at Safeway with a bunch of groceries. There’s only one checkout lane at Safeway, and the line is super long. It costs you $1 to check out… But if you’re paying $1.10 or more, you can skip to the front of the line. So you’ll get checked out eventually, but people can cut in line if they want.
Safeway then releases an announcement for you that evening saying the following.
“Safeway is sorry for the congestion at checkout. We’re proposing two new solutions.
The first solution is that we can open a second lane for customers, however with the new apartment building being built, it’s likely the same problem will arise in the near future.
The second solution is that we would like to adopt Amazon Go style checkouts. (Amazon Go is where there’s no checkout line, and it’s all done by phone tracking and computer vision as to what you put in your basket. Insane tech!). This is going to take us a year to build, but when we’re done, it’s going to be the smoothest experience that won’t require lining up, and will be able to handle the next apartment building and many more for the foreseeable future
Which would you like?”
Segregated Witness (SegWit) = Amazon Go (Short term we still have the same problem, but in the long term it’s very promising)
p.s Amazon Go. Check it out.
Blocksize Increase = Adding another checkout line (Problem is solved for right now, however it’s a band-aid solution and going to need to be addressed in another 12 months).
Take these examples and references with a grain of salt obviously, this is just to help give you a primer into what’s happening, and let you do your own reading if you find it interesting :)
Hope this was helpful!
Thanks so much.