Bitcoin Scaling Moment of Truth
Hi...
If you've been involved with Bitcoin for a while you will be aware of the "scaling debate" - the increasingly heated political argument on the best way to scale Bitcoin.
So what does that mean?
Scaling Bitcoin is essential going forward. Right now the Bitcoin network can process around 3.5 transactions per second - which is 210 per minute, 12,600 per hour and 302,400 per 24 hours.
As a comparison, the Visa network does around 1,667 transactions per second - or about 476 times more than Bitcoin currently. Visa also says its network is capable of doing up to 56,000 transactions per second.
Because all of Bitcoin's transactions are recorded for ever on the Blockchain, the way these transactions are handled impacts directly on its growing size - which is (as of writing) over 120 GB.
The scaling debate has become politicised with supporters falling into two camps - the big blockers and small blockers. Big blockers are those who want to see scaling achieved by increasing the block size, which is currently 1 MB. Small blockers want to see scaling achieved by technological innovations like the Lightning Network and other second layer solutions.
The group of volunteer Bitcoin developers known collectively as "Core" favour smaller blocks in order to avoid increased miner centralisation. Their solution is first to implement a soft fork known as "Segwit" or Segregated Witness. This patch fixes a problem with the Bitcoin software known as transaction malleability, and in so doing opens the door to the development of second layer technologies. As a by-product it also enables an effective block size increase to around 1.7 MB.
The "big blockers" are opposed to Core's vision and want to scale Bitcoin by simply increasing the block size. The "small blockers" support Core's vision for second layer solutions.
Another important fact is that Bitcoin can never achieve Visa-like transaction speeds by simply increasing the block size alone, it's simply not technologically possible as the Blockchain size would grow to unmanageable proportions.
There is also the fact that Bitcoin transactions are not instant and need to be confirmed, which means the on-chain network can never perform at Visa-like levels at the consumer level. Second layer solutions, on the other hand, promise both instant confirmations, cheaper transaction costs and transaction throughput on par with Visa.
The debate has become very heated, a war of words in fact - with both sides digging in and doubling down.
On the small block side a user-activated soft fork proposal (UASF) has been implemented which would activate Segwit via Bitcoin nodes (wallets that download the full blockchain). This is designed to force miners to activate Segwit, something until now they have been unwilling to do, for various reasons.
This "threat" has caused obvious concern which has forced a majority of major economic players - miners and various Bitcoin services - to come up with a compromise solution, a softfork/hardfork proposal known as Segwitx2. In this proposal Segwit will be activated by July 30 and a 2MB hard fork within six months. This is being referred to as the "New York Agreement" It's also known as the Bitcoin Scaling Agreement.
My own view is that Segwitx2 is the best way forward, as it will avoid any attempt to fork the network and split Bitcoin into two different coins. Yes, it's a compromise but it gives each camp what they want - Segwit and a block size increase.
More importantly, it will resolve the two-year-long scaling debate, open the way forward for second layer scaling solutions, and take the heat and wind out of the opposing factions in this debate.
All eyes will be on Bitcoin as August 1 approaches and no doubt a lot of FUD (fear, uncertainty and doubt) will be present on Bitcoin-related public forums. But my own view is that Bitcoin itself will prevail, and in so doing will have passed a critical and important milestone in its ongoing development and wider adoption.
All the best
Dennis