What do Nordstrom, Starbucks, and Whole Foods have in common? One answer that may surprise you: all of these stores now accept Bitcoin as payment. Indeed, the growing acceptance of Bitcoin should be a boon for the average consumer—low transaction costs, a large degree of privacy, high security due to the immutability of transaction history, and the stability brought by Bitcoin’s decentralization make the cryptocurrency an attractive choice as opposed to credit and other alternatives. However, despite Bitcoin’s broad appeal, it faces vast growing pains due to its premier limitation: scalability.
The problem of scalability
In simplest terms, Bitcoin’s scalability problem refers to how the network can not technologically support a large amount of transactions at once, which precludes it from serving a large clientele. Currently, Bitcoin is only able to support seven transactions per second on average. To put things in perspective, Visa is capable of processing more than 24,000 transactions per second. For Bitcoin to seriously compete with our existing payment systems and deliver its numerous benefits to consumers, it has to first match their processing prowess.
Why Bitcoin lags behind
To understand why scalability is such a monumental roadblock to Bitcoin’s development, it is important to understand the mechanisms behind Bitcoin that create this issue in the first place. Bitcoin relies on a technology called blockchain. A blockchain is essentially an immutable database that consists of 1 MB blocks of data (in Bitcoin’s case, the data are transaction records) stored in servers called “nodes.” Every node in the blockchain forms a network so each node updates the others and keeps them to date on transactions, effectively making the blockchain a secure ledger of transactions.
When Bitcoin is used as payment, a transaction request is sent to the network of nodes, and in a process called “mining,” the nodes verify the transaction by solving a cryptographic puzzle using complex algorithms and add a block containing the transaction to the blockchain. In a system called “Proof of Work,” nodes are incentivized to mine because they get a reward of Bitcoin if they are the first to solve the cryptographic puzzle. Transactions are validated by a consensus of nodes, which safeguards the system from fraudulent transactions by keeping it decentralized and giving no individual enough power to wreak havoc on the blockchain. This means that processing transactions for Bitcoin is painstaking and time-consuming work that takes at minimum ten minutes to perform, severely limiting the rate of transactions per second and thus decreasing the overall utility of the network.
Potential solution #1: Proof of Stake
There are, however, many proposed solutions to mitigate the issue of scalability and allow for more transactions to take place at one time. One such idea is to shift from the existing Proof of Work system to a Proof of Stake system. Under Proof of Stake, a user can only run a node if they possess a certain amount of Bitcoin. Using factors like the amount of coins owned, an algorithm assigns nodes to verify transactions and adds the transaction to the blockchain—the more Bitcoin one owns, the more transactions they will verify. This process eschews the complex cryptographic puzzles under Proof of Work because nodes are instead incentivized to act honestly under threat of losing their coins if they abuse their validating power.
However, it betrays one of Bitcoin’s core tenets: decentralization. Many are attracted to Bitcoin due to the fact it is not centrally managed by any one entity, but rather thousands of independent nodes across the globe. The implementation of Proof of Stake would place a large amount of mining and verification power in the hands of a select few who already have a lot of Bitcoin, edging out those with less. Nonetheless, Proof of Stake does not necessarily doom us to a “Bitcoin oligarchy:” it also removes the barrier of high tech for miners by eliminating the cryptographic puzzles, potentially increasing accessibility to many.
#2: Shard Chains
Another idea is to implement a feature called shard chains in the blockchain. In the current state of Bitcoin mining, each node needs to process all transactions that are added to the blockchain, costing a lot of processing power for each node and slowing down performance. Shard chains are meant to distribute the burden of processing transactions by partitioning the blockchain into several parts, making a node responsible only for its own shard rather than the whole blockchain. These side chains greatly increase productivity as the redundancy of each node having to process every transaction is eliminated. Furthermore, shards can share information with each other so any node can access all of the information stored in the blockchain, so records of transactions from different shards are still available.
Nonetheless, the increase in productivity comes at the expense of the security for which cryptocurrencies are renowned. Bitcoin’s current system of mining has safety in numbers because transactions are verified by consensus, so it is effectively impossible for anyone to gain access to a majority of nodes and create chaos. However, shard chains are much more susceptible to takeovers because it is much easier to garner a majority of nodes on a single chain.
#3: The Lightning Network
One more promising solution to Bitcoin’s scalability problem is the development of the Lightning Network. The Lightning Network is based upon Layer 2 (L2), which is a framework built over the blockchain to create changes and optimizations without changing the underlying structure. The specific L2 technology that the Lightning Network relies on is called state channels, which allow two parties to communicate and perform multiple transactions off the blockchain, only adding the net result to the blockchain afterward. Although these channels do allow for numerous rapid transactions, they also are more vulnerable to security breaches: hackers can potentially cause the channels to become congested and steal Bitcoin in the channels while they are overloaded. Thus, the Lightning Network is by all means an incomplete solution to the scalability issue because security risks make it safer to just use the original blockchain, especially for larger transactions.
For any fledgling currency like Bitcoin, growing pains are inevitable. When considering how Visa’s processing power dwarfs that of Bitcoin, it is vital to recognize that Visa had a 50 year head start to iron out its flaws and cement itself as a central payment system. Bitcoin is still undeniably a work in progress when compared to its competitors, but with promising developments and ideas like shard chains, the Lightning Network, and a system based upon Proof of Stake, we move ever closer toward a final product. Scalability may be a primary factor holding Bitcoin back as a normal currency in the present, but with boundless opportunities to innovate toward novel solutions, the cryptocurrency landscape will not stay that way for long.