Bitcoin’s Limits

As part of our ongoing series exploring the basics behind Bitcoin, today we’re exploring the cryptocurrency’s limits, and why that’s lead to the creation of thousands of new currencies.

What’s wrong with Bitcoin?

As Bitcoin has become increasingly popular, some of its features have created bottlenecks — and in some cases lead to arguments over what direction the currency should head in.

But sadly not everyone agrees on the best way forward. That has lead to a number of interesting developments in the currency.

Problems with Bitcoin: Speed

The present architecture of the Bitcoin network is capable of processing a maximum of seven transactions per second. For comparison, Visa’s network can handle a whopping 24,000 transactions per second.

That’s lead to delays in how quickly the network can validate transactions, which gets slower the more people use the network.

There’s also a speed issue when it comes to how often a new block is created on Bitcoin.

Satoshi Nakamoto allowed a new block to be created every 10 minutes, to help prevent fraud on the network. About 2,000 transactions can fit into a block, so backlogs of unconfirmed transactions are common.

Both of these have lead to a slowdown in how quickly the Bitcoin network can process transactions.

Problems with Bitcoin: Privacy

Bitcoin is only partially anonymous — experts call this pseudo anonymity.

How? Web trackers and cookies: the small pieces of code sat on websites designed to tell third parties what you’ve been up to as you travel around the web.

Once someone has that information, they can then trace your activity on Bitcoin and work out what you’ve been spending your money on.

Some Bitcoin exchanges also require users to submit identifying information. If these databases get hacked, then someone can find out what you’ve been up to.

Problems with Bitcoin: Fees

Because space in a block is limited, and there are only so many miners on the network, users have started attaching a fee to incentivise miners to include their transaction before others.

As the backlog of payments grows, spenders offer increasingly lofty fees to attract miners to their transactions. The fee is the same whether the transaction on Bitcoin was for £5 or £50,000 — making Bitcoin unsuitable for small transactions, like buying a coffee in the morning.

Want to know more?

This is just the tip of the crypto iceberg. LitePaper has a a whole host of easy-to-understand articles that make learning about cryptocurrencies, blockchain and DLT technology simple.

Click here to learn more.