How Does Bitcoin Scale?
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Today I want to talk about Bitcoin scaling, because it’s an area where I see a lot of misinformation. It’s also an area that I think is very exciting when you dig in.
I heard someone say, “I had a friend of mine who’s a technology expert look into Bitcoin and they told me it’s interesting but there’s simply no way it can scale.” Is the expert wrong? What’s going on here?
One of Bitcoin’s most important jobs is to process transactions that are transmitted to the network. Validation occurs from users running full nodes, and miners combine these transactions into a block which becomes part of the blockchain. The more popular Bitcoin gets, the more transactions are sent, generally speaking. However, there is an upper limit to the number of transactions that can fit into a block. This limit is based on the total size of the transactions, and the size limit has been raised over time. More recently, block size was replaced with block weight with the implementation of a scaling technology called “Segwit,” or segregated witness.
Pardon the technological mumbo-jumbo, but essentially this DOES mean that there is a limit to how many transactions can fit into a Bitcoin block. So, does the blockchain scale? It does, practically speaking. But the limitations of on-chain transactions mean that currently it’s probably only possible to broadcast 1-2 million transactions per day (depending on the transaction size). Simple math here, nearly 7 billion people on the planet but only room for 1-2 million transactions? In fact, the record number of transactions processed in a single day on the Bitcoin network was 498k according to Coinmetrics. Is this a problem?
It would be, if there wasn’t a plan. Fortunately, it turns out that Bitcoin is most likely destined to be the base layer for a new global monetary network. I would argue it’s getting close to that point already. Here’s what I mean. In the early days of the internet, it was widely accepted that the internet wouldn’t or simply couldn’t scale. The argument was basically that the more nodes you added to the internet the more traffic would need to be transmitted. This is a typical n-squared problem. With a limited amount of information that can be passed down a copper wire, it seemed the internet critics could be correct.
However, as we know now the limits of network transmission have been increasing steadily. Dial-up service may have peaked at 56k, but then there was ADSL, DSL, Cable Internet, Fiber Optics, Cell phone networks like 3g, 4g, 4gLTE, 5g, etc. What does this have to do with Bitcoin and its self-imposed block size limit? It turns out that one of the ways we scaled the internet was by using the OSI model. That model basically says that each layer of the network has a set of things that it’s responsible for. Hardware needs to provide a steady, physical connection for example. As you go up from the hardware layer you eventually reach the application layer, where programs that you run make connections with whatever they need to with only minimal consideration to the medium of transmission. Think about it, does an ethernet cable care what it’s being used for? Does Microsoft Word care if you’re using a wired or wireless connection?
One of the most important distinctions of the Bitcoin network is its simplicity. The more responsibility you try to pile onto a technology, the more difficult it becomes to maintain. Satoshi knew this, and also that simplicity lends itself to having a smaller attack surface (better security).
But if Bitcoin is the base layer of a new economic system, what are the layers that it will support? One interesting development on this front is the use of wrapped BTC, that is programmatically locking Bitcoin so that it can be transmitted on another blockchain. Why would you want to do this? Well Bitcoin is what you might call the pristine collateral of the digital asset universe. DAPPS need something of value to secure them. And since Bitcoin is the most secure and most valuable digital asset, it’s a natural fit. You might argue that this application is not a second layer, but rather a horizontal scaling solution and you might be right.
However, I think that clearest application of second layer Bitcoin technology is the Lightning Network. The premise is that since it’s possible to say with a high degree of certainty that a Bitcoin transaction is final, you can sort of bootstrap the security of locked Bitcoin. Then, once the funds are secured (think “deposited”), they can be transmitted with incredible speed (fractions of a second) to anyone using the Lightning Network in a way that actually gets faster the more people use it.
Critics will tell you that this technology is nascent, and to an extent they are correct. But the promise of this technology is that Bitcoin will simultaneously be the store of value that we’ve come to know and love and also enable near-limitless throughput for any daily transaction you might want to make.
It’s worth noting that while the Bitcoin blockchain (eg. Base layer) will continue to grow, the majority of the expansion that we should expect will come from the second and third layers. But while this is going on, the base layer is getting more robust. Several developers have proposed solutions that will increase the throughput of the base layer and the speed of transaction validations significantly (bulletproofs, Schnorr signatures, etc.). Taken as a whole, I believe that the big picture is that the base layer will continue to scale in a natural logarithmic curve. That is to say that scaling the base layer will never be complete, but at a certain point the increases in throughput will be minimal. Bitcoin transmitted on the Lightning Network only touches the Bitcoin blockchain when funds are deposited or withdrawn. This means that hundreds or thousands of transactions could be sent or received with a minimal footprint on-chain.
Already we are seeing an entire ecosystem spring up around the promise of the Lightning Network. Exchanges are starting to accept LN deposits and withdrawals. Tipping bots exist on social media platforms where users can send microtransactions in seconds. And hardware companies are building specialized equipment so that users can run their own Lighting Node.
Bitcoin will continue to scale to meet the needs of the network. But we should not think of the blockchain as the end-all be-all. The blockchain is just one piece of the puzzle.
