Why a 1MB Block Size May Be Right for Bitcoin Today

Ariel Deschapell
Jul 3, 2016 at 16:40 UTC
Updated Aug 12, 2016 at 17:16 UTC
opinion

Ariel Deschapell is currently content manager for Ubitquity, a blockchain real estate startup, and recently held the Henry Hazlitt Fellowship at the Foundation for Economic Education.

In this opinion piece, Deschapell argues the current cap on bitcoin transactions isn’t likely to hurt the technology’s long-term adoption, and that more creative solutions should be prioritized.

blocks, see-saw

Bitcoin finds itself at an interesting, perhaps even pivotal, moment.

In the wake of the UK’s EU referendum, or ‘Brexit’, many financial news outlets have taken to recognizing bitcoin’s increasingly credible role as a safe haven asset. Institutional investors like Daniel Masters are starting to signal it could be ready for primetime, and the market cap is hovering around $10bn after a recent string of gains.

But as its price and investment outlook continue to improve, a question hangs over the decentralized network behind the digital currency: Can it scale to meet adoption pressures?

On its current development trajectory, some don’t think so.

The technology behind bitcoin is called the blockchain. Blocks containing all recent transactions on the bitcoin network are confirmed about every 10 minutes, and are currently capped at 1MB of information a block.

The problem? Average block sizes are trending closer to this limit and some are already hitting it, pushing excess transactions to the following block. Consequently, there are periods of delayed confirmation times and higher transaction fees that have many in the space feeling anxious.

As a result, the question of how to scale bitcoin is currently the most divisive in the space.

While the Bitcoin Core developers have a plan in place, a vocal minority believes more immediate action is required. The coming months will cement which approach is taken, so it’s important to explore if that more immediate action is needed for bitcoin’s continued success.

How should bitcoin scale?

The dream of bitcoin evangelists is for the currency to one day end the global patchwork of sovereign fiat currencies and be the principal means to carry out all transactions.

These are lofty goals, and to even have a chance at attaining them, bitcoin needs to first solve its very real technical limitations. While bitcoin is a sound, inelastic currency, the truth is that the attached payment network cannot currently support even a fraction of a fraction of today’s global transactions.

Take just the Visa network for instance, which hit 47,000 peak transactions per second on its network during the 2013 holidays.

In comparison to this single centralized payment processor, the bitcoin protocol can only handle a handful of transactions per second. Clearly, to reach its ambitious goals, bitcoin needs to improve its transaction throughput by an order of magnitude. The easiest way to increase this number is by raising the current 1MB cap on the block size. It’s also the worst way of doing it.

As developers Joseph Poon and Tadge Dryja wrote in their white paper on bitcoin payment channels:

“If we use an average of 300 bytes per bitcoin transaction and assumed unlimited block sizes, an equivalent capacity to peak Visa transaction volume of 47,000/tps would be nearly 8 GB per bitcoin block, every 10 minutes on average. Continuously, that would be over 400 terabytes of data per year.”

These dramatic numbers tell us that increasing the block size alone is a non-starter as a long-term plan for scaling bitcoin.

Any increase creates greater centralization pressure on the backbone of the network: miners and nodes. Without a robustly distributed network, bitcoin is more vulnerable to censorship and attack. To put it differently, to increase the block size is to make a conscious tradeoff between decentralization and performance.

Yet bitcoin’s decentralization is its single greatest feature, as it underpins its immutability and resistance to censorship. Without these features, bitcoin is reduced to simply being a very cumbersome and expensive PayPal. So, if bitcoin can instead be scaled without sacrificing any degree of decentralization, then this is clearly the path that should be taken.

This is why we need long-term scaling solutions that tackle the heart of the problem.

The network as it stands cannot scale effectively. Therefore, the way the network itself works needs to be optimized and built upon. The optimization comes from upgrades like Segregated Witness, which streamlines the way blocks process transactions and increases efficiency without increasing block size.

SegWit also sets the foundation for future upgrades which will add on to bitcoin proper and dramatically increase its transaction throughput.

These are concepts such as the Lightning Network and sidechains, which can be read about in more detail elsewhere.

Isn’t a 1MB cap hurting adoption?

Even with Segregated Witness undergoing testing, and various top-level protocol implementations in development, some urgently insist the problem is blocks are getting full now.

The argument generally goes like this: As blocks near capacity transaction times get slow and fees get higher. These issues mean less adoption, and less adoption means a faltering network effect and dying bitcoin. Thus, we need a hardfork to increase the block size to at least 2MB for an immediate capacity increase while longer-term solutions are developed.

But increasing the block size even marginally still carries with it security risks, and remains a cumbersome way to scale bitcoin period.

In this light, the only reason to push for a hardfork is if it can be shown that fuller 1MB blocks actually and significantly hinder short- to medium-term adoption. They don’t.

Fuller average blocks mean higher fees, and if those fees are not met, then yes, there will be slower confirmation times on the network.

From a Bitcoin evangelist point of view, it’s easy to see how this could hurt adoption. A consumer using bitcoin for the first time and running into a severe confirmation delay for a retail transaction might very well get turned off from the overhyped technology that doesn’t work exactly as advertised.

And it’s these types of smaller transactions which fuller blocks disproportionately impact. The problem is that this scenario is still largely a dream.

Bitcoin is years away from being easy enough for the average consumer to acquire on their phone to use it as a serious alternative to something like Apple Pay or even Venmo. The truth is bitcoin today is already absolutely terrible for those use cases. That simply isn’t where current growth is coming from. The reason is simple but powerful: volatility.

For day-to-day living and expenses, no average consumer in their right mind is going to put up with a wildly fluctuating currency when a far more stable and accepted one is readily at hand.

As the mainstream media is realizing, the lion’s share of bitcoin’s current growth is undoubtedly as an investment and speculation vehicle. These type of transactions tend to be much larger in value than retail ones.

This is correlated by numbers available at Tradeblock, which can show us that the average bitcoin transaction between 27th May and 25th June was around 12 and 14 BTC, much larger than any conceivable retail purchase.

Here, bitcoin doesn’t need to beat instant credit card transactions and stable purchasing power. It just needs to beat traditional bank transfers and wires (which at three to five business days with high fees will remain an absurdly easy task), and comparable asset performance elsewhere.

As bitcoin becomes a more proven and sought after investment commodity, its market cap will grow. Volatility should decrease as a result, making it gradually more suitable for the use cases of the average consumer.

This is when reliable, fast, and cheap micro-transactions become far more important to growth. But this won’t happen within the next few months. It won’t even be happening by the time a Lightning Network implementation has been successfully deployed, and probably not for awhile after that.

That’s because ending the patchwork of fiat currencies is a very long process. True Bitcoin evangelists are in it for the long haul.

The evangelists who believe fuller blocks will hurt or even kill bitcoin adoption in the short-term cannot see the forest for the trees. They want to see the bitcoin currency adopted by the masses, and make an error in believing that its first phase of growth pivots on that mass adoption.

In truth, even without network throughput being an issue, we are still so far away from that. The masses won’t drive bitcoin’s growth, yet. Investors and speculators will continue to do that heavy lifting, and the system will continue to work great for them even if blocks are temporarily fuller.

Block size increases will eventually come, but they’re a very small part of the scaling equation. Hardforking now won’t give us anything except the illusion of progress and added problems for Bitcoin Core developers to address.

Blockchain scalability is not an easy fix. It is only with slow, steady, and creative problem solving and development that it will be addressed.

While that foundation is being laid, there’s little reason and no evidence that adoption will be immediately hindered by a continued 1MB block size.

Wooden blocks image via Shutterstock