The Issue of Scalability of the Bitcoin Network

Satoshi Nakamoto launched the Bitcoin network in 2009. All the transactions that occur on the network become a part of the network blockchain, which is a transparent, decentralized ledger that is impossible to change.

Nakamoto created the network in such a way that the network creates a block of the bitcoin blockchain on average every 10 minutes and the size of every block is 1 megabyte. You can see the sizes of all the blocks on the network, the time it took the network to create the blocks and a lot of other information about all the blocks on the bitcoin blockchain, including information about all the transactions that have occurred on the network since its inception, at https://blockchain.info/

Because the blocks have a limited size and the network creates a block on average every 10 minutes, bitcoin blocks can only fit a limited number of transactions on them. As the network started to grow exponentially in the last several years, this has become a very big problem. 10 minutes to create a block of 1 megabyte means that the Bitcoin network can process only between 3 and 7 transactions per second versus payment gateways such as Visa that can process over 45,000 transactions per second.

This limitation has resulted in two big issues. The first issue is the issue of transaction fees.

The vision of Satoshi Nakamoto for the Bitcoin network was that as the network keeps growing, miners will be incentivized to process transactions and add them to the blockchain because they will be getting new bitcoins for doing so. As the network mints all the 21 million coins by 2140, miners will keep adding blocks to the blockchain because users on the network will be paying fees to send funds.

You can choose to pay a fee when you initiate a transaction on the Bitcoin network. Many of the software wallets offer a flexible fee option, meaning that you can choose to include a fee between 0% and 100% of your transaction. A 0% fee means that you expect miners to include your transaction into a block of the blockchain for free.

Theoretically, this can happen because miners are being rewarded by the network in the form of block rewards. In certain instances, it may make sense for them to create blocks with free transactions because they can get a reward for creating a block no matter whether it contains paid transactions or free ones. However, miners do not have to include any specific transaction in a block. It is up to them to choose the transactions that they will add to a block. This means that when there are a lot of transactions on the network, miners will start looking for transactions that come with a fee. Miners keep all the fees from the transactions that they include into the blockchain blocks, which leads to competition from senders in the form of voluntarily increasing the transaction fee.

The fees go up and down because of the laws of supply and demand and be governed by a completely free and transparent marketplace.

As the number of transactions on the network kept growing, the fees to include a transaction on the blockchain also kept growing. For example, on December 24, 2017 the average transaction fee on the Bitcoin network for the day was $43.20. A transaction fee on the Ethereum network on the same day was just $0.8. You can see the current transaction fees on a website such as https://bitinfocharts.com/comparison/transactionfees-btc-eth.html

 

One of the obvious solutions to the bitcoin network transaction processing issue would be to increase the size of a block. Satoshi Nakamoto himself did make statements that supported increasing the block size. However, he had never made any comments about when and how the increase could occur. Nakamoto saw bitcoin as a “peer-to-peer electronic cash system,” which was the title of his whitepaper. Having to pay over USD$40 to send a micropayment on the bitcoin network was not what Nakamoto had in mind. In one of his posts, he said that he believed that issues of bandwidth and storage would not be a problem because their efficiency and price keeps going down. He also said that the network would need to be able to accommodate micropayments and make them practical. These statements by Nakamoto suggest that the initial restriction on the size of the block on the bitcoin blockchain network was to make running nodes on the network attainable for personal computers on a regular home Internet connection.