Bitcoin's user base has increased significantly, along with a daily transactions figure in the hundreds of thousands. In its current state, Bitcoin cannot process these transactions fast enough and it has hit a bottleneck in terms of its ability to scale fast enough. The scaling issue is a cycle that will repeat itself again and again over the coming decades and there are solutions pending to resolve the current situation.

The Background to Bitcoin's Scaling Problems.

As a security measure to prevent DoS attacks on the blockchain, Satoshi Nakamoto introduced a block-size limit of 1 Megabyte was, but this has come with limitations on the capacity of the network to handle transactions as the amount of transactions has increased, with each 1 Mb block only being able to handle 7 transactions per second. During peak loads, users have experienced waiting times ranging from several hours to several days and this has had a knock-on effect of increasing transaction fees and Bitcoin has appeared at times to be just like making a bank transfer.

The obvious solution to this existential scalability issue was to adjust the 1 mb block size. The first solutions were hard, or soft forks, such as Bitcoin Cash, which adjusted the block-size limit to 8 mb, though this inevitably compromises the security of this particular project. Another was SegWit, which allowed for an increase in the block size to about 2 mb, rather than the 4 mb often touted, whilst enabling some non-critical data, called “witness data”, to be moved out of transactions and off the Blockchain and therefore has less security concerns.

There is also another way SegWit could increase transaction capacity, albeit not directly. Fixing the transaction malleability makes the Bitcoin network secure enough to build second-layer blockchain solutions on top of it, that could make Bitcoin transactions much cheaper and faster than ever before.

Second Layer Solutions

The Lightning Network

The LN is a second layer solution to network bloating, only intended to be used for less risky micro-transactions, which make up the majority of the current network's load. It has the benefits of improved privacy and payments are settled in a fraction of a second, at a fraction of the current transaction costs.

What is unclear at this stage is how much difference the Lightning Network will make to network bloating, as the major exchanges say they won't run the Lightning Network, because of their AML/KYC requirements and the knowledge required to use it is unlikely to result in a significant uptake in its use by the average customer.

The Lightning Network enables two parties to set-up a payment channel to transact with each other by means of a multisig wallet, which both parties are required to sign to confirm how much of the Bitcoin in this wallet in owned by each party and the wallet address is saved to the blockchain. This payment channel can be used by the two parties to transact with each-other as many times as they wish.

After each transaction is completed, the payment channel is closed and the new balance of the wallet is recorded on the blockchain. Disputes will be resolved according to the last balance which was signed off by both parties.

Larger transactions that require more security will continue to be sent through the decentralized core layer, with the security of the blockchain behind it

Usable lightning software is available now, which can be run on the testnet, or on the mainnet (although this is not advisable at the moment due to the bugs that are still yet to be ironed-out) See https://lightning.network/ for more information.

Schnorr signatures

In order for a Bitcoin transaction to be successfully completed, it requires a signature, which increases the transaction size and takes-up space on the blockchain. Schnorr signatures reduce bandwidth by an estimated 25% by consolidation of the signatures to make them more compact and improve efficiency, use less block space and make it cheaper on the fees. This scalability solution is about a year away.

NimbleWimble

A solution coming to cryptocurrency a couple of years down the line is Nimblewimble, which targets extreme privacy and extreme scalability at the same time. Nimblewimble streamlines the blocks by reducing the amount of data that has to be stored and processed, making growth more sustainable over time as the transaction data doesn't continue to get larger and larger and more transactions than can fit into each block. MimbleWimble uses a blinding element to obscure all values - transaction amounts and keys - while holding true basic mathematical facts to obscure real values. The lead developer of the Nimblewimble testnet, Ignotus Peverell said "We hope to have as many bug reports as possible, so we can start fixing issues we've overlooked. At this point, one can still expect failures that would be a complete nightmare on a mainnet." [ https://www.coindesk.com/magical-realism-mimblewimble-just-launched-first-testnet/ ]