The problem lies in a certain parameter called the “block size limit”. First, we will spend a very quick acquaintance with the basics of Bitcoin for those who do not know. All transactions that have ever occurred on the Bitcoin network are recorded in a public and intrusion-protected registry called the “blockchain.”
The main issue
All these features of the functioning of the system led to the problem of scaling Bitcoin and limited its theoretical size. A blockchain is a sequence of blocks, each of which is a set of transactions protected by cryptographic algorithms. At the same time, Satoshi Nakamoto (about a year after the creation of Bitcoin) limited the block size to one megabyte. This was done in order to prevent possible DoS-attacks of intruders when they create large (in theory unlimited) blocks to paralyze the network.
However, such a security measure had a negative effect on the network capacity in general (in the long term). Today, bitcoin can process about 7 transactions per second (TPS). At the same time, the actual load on the Bitcoin network is 3.5 TPS. For comparison, the TPS indicator in the Visa system is 2,000 (at the moments of peak activity – 50,000).
How to solve it?
The initial simple solution was to increase the block size. But this idea was not easy. But there was no clear agreement on how much it should increase. Some were in favor of 2 MB, another advocated for 8 MB, and one developer wanted to go up to 32 MB.
At that time, an increase in the block size was the simplest solution from a technical point of view, but none of the schemes was implemented. Refusal to implement turned out to be associated more with political (within the Bitcoin ecosystem) problems than with technical ones. The presence of large blocks could lead to the centralization of Bitcoin, since their storage and processing would require even more computing power, and only large companies can allocate such amounts of resources. Thus, there would be a contradiction with the main idea of Bitcoin blockchain as user-controlled cryptocurrency.
Solution 1: SegWit
Segwit is an abbreviation for the term Segregated Witness, which can be literally translated as “separated witness”. Understanding the meaning of this term will be easier after considering the structure of a transaction on the Bitcoin network.
Solution 2: SegWit2X
In 2017, a new approach was discovered: Segwit2X. This idea — supported by several of the largest exchanges in the sector — combined SegWit with an increase in block size of up to 2 MB, which effectively multiplied the capacity of preliminary transactions up to 8 times. The proposal, which did not solve the problem, caused another wave of discord. The way it was resolved and its lack of protection against replay struck many. And the deliberate redistribution of power from developers to miner enterprises threatened to cause a fundamental split in the community.
Solution 3: Schnorr signatures
This is a way to improve network bandwidth by aggregating the signatures needed for BTC transactions. The size of the transaction becomes smaller. This means that additional transactions will be added to the network. In addition, the commission is calculated per byte.
Bitcoin scaling options
While the use of bitcoin as a payment mechanism seems to be fixed in its value as an investment asset, the need for more transactions is still relevant. After all, fees charged by miners for processing are now more expensive than equivalents in Fiat. Moreover, taking into account that we are still at the beginning of the evolution of cryptocurrency, the development of new features that enhance functionality is crucial for the implementation of the base blockchain technology.