NewsEd #3 — Bitcoin Scalability
By: Daniel Benarroch
Tags: Segwit, Scalability, Blockchain, Ethereum, Bitcoin

Dear Blockchain Enthusiasts,

It has been more than two weeks since I last wrote in Decoded Blockchain, and I want to apologize for keeping you intrigued and waiting. I was formalizing a bit more this initiative.

First of all, we have a logo (see above, in case you did not)! Second, I have created a medium publication for you to have easier access to the previous posts (follow me!). Lastly, I have redefined the initiative: it is not a newsletter per se, but a newsEd (educational newsletter), which aims to educate about the topics appearing in current events and news and is not necessarily sent weekly.

Educational

I will focus this newsEd around the issue of blockchain scalability, more specifically about the scalability issues present in the Bitcoin network. Let’s first start by understanding what we mean by scalability.

Scalability is the capability of a system, network, or process to handle a growing amount of work, or its potential to be enlarged to accommodate that growth — Wikipedia

Bitcoin nowadays can handle an estimated 7 transactions per second, which compared to Visa, who can process about 50,000, is nothing. This makes Bitcoin in its current form a non-scalable system, since it cannot accommodate for the billions of people worldwide that would want to use a global decentralized currency. In order for us to understand what can be done to improve its scalability, we must understand how Bitcoin works a bit more in detail. This may get a bit technical, but please follow me.

We know that a (full) user of the Bitcoin network must maintain a (full) copy of the blockchain, which in this case mines a new block every ~10 minutes, given its consensus algorithm (uses proof of work), which is the way that nodes agree on what transactions go into which block and what blocks are added to the chain. As of today the Bitcoin blockchain has crossed the expensive 100 gygabytes (gB) threshold, making for a total of about 500,000 blocks and has undergone several hard forks aimed at improving these numbers.

There is a clear limitation here, where each block has a fixed size of about 1 megabyte (mB) and every transaction on the blockchain has a fundamental size of an average 250 kilobytes (kB) (not to be confused with the amount of value that is sent). Then, given that a block is mined every ten minutes, we get our limit of 7 transactions per second. Additionally, it causes miners to pick and chose the transactions that they want to include in the next block, raising the transaction fees drastically and congesting the network as there are many transactions pending. Essentially, there are two aspects of the Bitcoin system that affect its scalability.

The first is at the level of the structure of the data exchanged on the blockchain.

The second is at the level of the consensus rules, which I will leave for another time since it is more complex and less relevant to current events.

The amount of memory needed to store the transaction in a computer is literally determined by the number of bits it takes to represent the information in the transaction, such as the destination address, the value of the transaction and the cryptographic signatures that allow to prove ownership of the coins.

For several years, there has been a debate going on about how to increase the number of transactions per block. There are basically three camps: first there are those who believe the maximum block size should be increased. This caused the bitcoin blockchain to hard-fork last July, creating the new cryptocurrency, Bitcoin Cash, which has a block size of 8 mB and whose value has gone up by about 150% in the last week. People argue that this increase will only cause more centralization as miners receive many more transaction fees.

Second, we have those who believe we should decrease the transactions sizes by decreasing the amount of data attributed to the digital signatures that appear in the transactions (given that right now they take up about 3/4 of the whole transaction size). This belief has generated the SegWit2x movement (ELI5 of segregated witness), which aimed to hard fork in the next couple of weeks, decreasing the transaction sizes by half, hence doubling the number of transactions per block. This article is a good overview of the arguments for and against SegWit2x.

Finally, the third camp are those against any of the two. In general, everybody agrees that the number of transactions per second must increase, but those in the third camp believe that if something is to be changed in the bitcoin network, it may as well be for the long term, and not in a way that in another four years we may have scalability issues once again.

The most interesting and current aspect of this debate is that a few days ago, the people who initiated and coded the SegWit2x network, retracted from the project and said they were not going ahead with the hard fork. Their reasoning is one of the most inspiring moments in this new era of decentralized everything. They made the point that the community is better off being together, since creating such divisions is not healthy for the future of the technology and the trust that people and enterprises put on the system.

“Our goal has always been a smooth upgrade for Bitcoin. Although we

strongly believe in the need for a larger blocksize, there is something we

believe is even more important: keeping the community together.

Unfortunately, it is clear that we have not built sufficient consensus for

a clean blocksize upgrade at this time. Continuing on the current path

could divide the community and be a setback to Bitcoin’s growth. This was

never the goal of Segwit2x.” — Mike Belshe, Wences Casares, Jihan Wu, Jeff Garzik, Peter Smith and Erik Woorhees

To finish with some community drama, there are people that reject the retraction (huh?). BT2, the name for bitcoin SegWit2x, was being traded as futures in some exchanges at around $1200. Right after the cancellation of the fork, it plummeted to $200, making people lose a lot of money. Interestingly enough, some people are still trading futures for BT2. This can mean one of two things, either a small minority of the bitcoin community will go ahead and create their own cryptocurrency, as happened with BCH, or a new phenomenon has been established, where people trade assets that could have happened (HUH?)

What’s the Buzzz?

A major vulnerability in one of Ethereum’s wallet implementation was “accidentally” exploited by an amateur programmer and froze about $300 million in Ether. Read more about it here.

Aside from the cancelled fork, the Tezos chaos is still on. A class-action lawsuit has been put forward in California, alledging that the Tezos organizers violated U.S. securities laws and defrauded participants of the ICO. The organizers then asked for patience and understanding during a major conference. To be determined what will happen.

The past couple of weeks saw some of the most important conferences around the blockchain community. Starting with Money 2020, which is the largest financial conference, hosted in Las Vegas, and has been focusing a lot on blockchain the past couple of years. Followed by the largest developer’s conference in the blockchain space, DevCon#3, organized by the Ethereum Foundation, here you will find great summaries of the talks. Finally there was Scaling Bitcoin, the largest theoretical conference around blockchain technology and decentralized protocols. The video recordings of the talks are available here.

Some Use-Cases

Self-sovereign identity — a system that allows for people to fully control their data and its disclosures, while maintaining the functionality of the interactions between parties. It is thought that blockchain could provide a solution to digital identity.

Cryptoassets — clearly one of the main uses of the blockchain is to create digital assets (and trade them), simply put to make money. In a letter to Jamie Dimon, CEO of JP Morgan, the company Chain defines what a cryptoasset really is. Here is a thorough (yet maybe not true) prediction of where Bitcoin and other cryptocurrencies may be in 20 years from now.

Last newsEd’s Highlights

Smart Contracts — https://blockgeeks.com/guides/smart-contracts/

Blockchain Explainer — https://unwttng.com/what-is-a-blockchain

Privacy solutions for blockchains — https://hackernoon.com/privacy-on-the-blockchain-7549b50160ec

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https://groups.google.com/d/forum/decoded-blockchain

Disclaimer: Curated by Daniel Benarroch Guenun, the Lead Cryptographer at QED-it. Follow me on twitter @BenarrochDaniel. The opinions expressed in this newsEd are solely mine, and do not represent those of QED-it.