Bitcoin is the best-known cryptocurrency of all and by far the most important one. It is ahead of the competition in market capitalization and no other digital currency can hold a candle to it in terms of transaction volume. But can BTC become the global currency of the future?
Bitcoin was committed to making electronic transactions viable for everyone. Without relying on the centralized control by financial institutes, but rather with a peer-to-peer consensus mechanism.
Hashed and digitally signed transactions and a public ledger based on the blockchain made the design revolutionary. Satoshi Nakamoto, the mysterious inventor of BTC, had solved the double-spending problem of digital currencies and mined the genesis block on the 3rd of January in 2009.
The increasing popularity of bitcoin didn’t only result in a higher value for the digital asset but has also surfaced the inevitable problem: No system is built for endless scalability. To better understand the issue we have to get a bit technical.
Transactions (TX)
One of the most important concepts in Bitcoin is transactions. These “transfer” value, in form of Bitcoins, from one wallet to another on the network. Transactions contain the number of Satoshis (the smallest Bitcoin unit), the wallet addresses of the sender and the receiver.
The TX is broadcasted to the network, awaiting verification, and is then added to the distributed ledger (blockchain) by a node. Transactions transfer the property rights on Bitcoins between people.
Nodes
In his whitepaper, Satoshi used the term node synonymously with a miner. Generally speaking, nodes verify transactions and then add them to the blockchain.
For the verification of a TX, the node will double-check that each coin sent in a transaction also refers to a previously received coin. Nodes have to solve complex cryptographic computational tasks (mining) to create a new block before the verified TX can be added to the blockchain.
Throughput of BTC
The current Bitcoin network creates one new block every 10 minutes. This block has a size limit of 1 megabyte and 4000 transactions. This results in the following limitations of the BTC system:
-
max. 7 transactions/sec
-
min. 10 minutes for a transaction confirmation
The Bitcoin network takes bandwidth limitations into account. In situations where there are more transactions than bandwidth, the mempool of nodes is acting as a buffer or waiting room for transactions. Here, the TX sits until being inserted in a newly created block.
Prioritization of Transactions
In times of high congestion of the network, there are many more transactions than there is space in the blockchain. It is then the transaction fee that decides the priority (who will be served first).
The higher the fee, the more likely it is that the node chooses a transaction to be part of the next block in the chain. Transactions with low fees can end up not being written to the blockchain for days, weeks, or even months.
This is a not preferred situation when you want to pay your goods. You either have to pay a high fee on top of the price of the good or the vendor will wait for your payment until your cappuccino is cold.
Protocol Issues
Bitcoin won’t be able to become a meaningful digital currency without technical changes to the protocol. The throughput is just too low for this purpose. Any medium-sized bank exceeds the limit of 24,000 transactions per hour.
The increasing amount of fees necessary to guarantee a timely transaction is a result of the scalability issues.
Protocol Changes
Making changes to the protocol of bitcoin is the only way to improve the transaction speed of the network and build a more sustainable system. But changes have their challenges as we have seen in 2017 when an upgrade called SegWit was introduced to the bitcoin network.
The update increased the effective blocksize by a factor of 1.8 by redesigning the content in each block. This change was controversial and lead to the hard-fork Bitcoin Cash. The community was stuck in a discussion on who controls the changes to the protocol. As a result of the debate, Bitcoin did not receive any major protocol upgrade since 2017.
Now in 2021, the network introduced Taproot which is a soft-fork and features the new Pay-to-Taproot (P2TR) transaction type, which combines the concepts of Schnorr signatures and Merklized Alternative Script Trees (MAST); it increases transaction privacy and requires significantly less storage for complex output conditions.
Outlook
Recent updates to the BTC protocol have increased the transaction volume of the network. Nevertheless, Bitcoin is no longer focused on “Fast Money” or usability in commerce but rather has become a digital asset to store value.
Other cryptocurrencies have emerged and might become a way to pay your cappuccino.