Don't increase block size because of Bitcoin transactions

Source/Economic Education Foundation Author/ Vivek Rajasekhar Translation/BTCC

Some media described the internal conflicts in Bitcoin regarding capacity expansion as being like a scene from The Avengers.

For those who don’t know, the Bitcoin protocol has an inherent limit that each block can only handle 1MB of transaction data, once every ten minutes. Satoshi Nakamoto chose the 1MB upper limit to prevent “denial of service” attacks against the Bitcoin network.

As an avid fan of the Foundation for Economic Education, I still have to take issue with Roger Ver’s recent article in support of Bitcoin’s block size increase, colloquially titled “Bitcoin Jesus.” He is a full-throated supporter of free markets and financial backers of many institutions, which is helpful. However, when it comes to the issue of block size limits, I think Roger’s own passion for Bitcoin gets the better of him and prevents him from making better judgment.

It’s easy to understand why increasing the block size is so appealing, and why so many major media outlets (NPR, The New York Times, etc.) are in favor of it. Their answer is simple and direct: we want more transactions on the blockchain, so we need to increase the block size, right? Therefore, those who are against increasing the block size are naturally those who are against the success of Bitcoin.

Even r/btc is rife with rumors that Bitcoin Core developers (several of whom work for startup Blockstream) are trying to limit Bitcoin so that more transactions can be made on their private network. This is untrue, as Blockstream is merely a company that provides funding for the development of blockchain technology, which was established before the company was founded.

Every product of Blockstream is open source software, which means that like Bitcoin, people all over the world can test, run, and fork Blockstream's code as long as they want. Importantly, the founders of Blockstream have a long history of fighting for Internet freedom. Greg Maxwell, a former member of the Mozilla Foundation, said: "When I worked with other long-term developers of Internet protocols in the Internet Engineering Task Force, we always regretted that the network encryption technology we built was not the default and always existed... I don't want to make the same mistake with currency. I think if we want to replace other forms of currency, we need to improve privacy."
Maxwell is more than just talk. He invented CoinJoin and Confidential Transactions, two protocols that greatly improve the privacy of Bitcoin transactions. Meanwhile, Dr. Adam Back has been involved in the crypto-crypto movement for decades and invented the Hashcash proof-of-work system that forms the core of Bitcoin. The idea that these people and their colleagues want to undermine Bitcoin is ridiculous, and anyone who wants to increase the block size cannot be trusted.

Andreas Antonopolous rightly said: “The only way Bitcoin naysayers can interfere with the system is by spreading rumors, scaremongering, and sowing pessimism in the conversation.”

However, the reasons for keeping the block size below 1MB are not easily understood by the general public and require a deeper understanding of how blockchain technology works, and in general, how successful networks are built, which I will explain below.

In Roger's article, Bitcoin is compared to Starbucks. He believes that the 1MB limit of Bitcoin blocks is like limiting Starbucks customers to 20 people per day. If Starbucks really does this, it will definitely go bankrupt. Bitcoin is more like Starbucks that the government has always wanted to close down, and it is precisely because it cannot be closed that it will continue to exist.

Bitcoin's regulatory arbitrage is minimal, equivalent to the cost of sharing media content on the BitTorrent platform. Users send Bitcoin from one person to another, and instead of just recording the transaction on a single server (like PayPal and any other bank), miners compete to bundle the transactions into blocks. If the government controls or bans any mining activity, others in the world will participate and compete for the block reward. So far, the system is decentralized enough to maintain its independence, but it is also centralized enough to reduce redundancy, thus achieving a perfect balance.
Blockchain is expensive, recording transactions on thousands of servers, which is much more expensive than traditional finance, which only requires a trusted and regulated third party like PayPal to run the servers.

The advantage of Bitcoin is that it works when other payment networks don't (e.g. banks blocked Wikileaks). Bitcoin can be used in some underserved, government-unsupported markets.
Unfortunately, Bitcoin has been portrayed as a free or cheap transaction network for many years, which is clearly not true. Today, Bitcoin is rarely used in retail, which is why payment processors like BitPay are struggling to survive despite millions of dollars in investment. People who support Bitcoin block size expansion are too focused on this, believing that Bitcoin must remain low-fee. But real Bitcoin users don't care about free transactions, they care about the freedom to trade.

Roger Ver and his supporters are misguidedly keen on keeping Bitcoin cheap, and they are promoting policies that are jeopardizing the health of the Bitcoin network. One of the theories Roger Ver has put forward is that with more block space, transactions will be cheaper, which will lead to more users, which means more nodes and a more robust Bitcoin network. But there is little evidence that Bitcoin users care about the cost of using the Bitcoin network.

They use Bitcoin because the status quo does not meet their needs, not because of high transaction costs. In addition, there is no evidence that these new users will use fully confirmed nodes. They are more likely to use lightweight wallets, such as Mycelium or Breadwallet, where users can make transactions but do not contribute to the security of the Bitcoin network.

Roger detailed how increasing storage, bandwidth, and CPU power would reduce the cost of adding blocks. But none of this matters, as miners pack transactions into blocks that must be propagated across the network. So, in this race for miners to find the next block and get paid 25 bitcoins, what matters is the potential factor, i.e. how long the blockchain in which the block is located can be.

Moore's Law, Nelson's Law, and other advances in computer hardware and network computing power will affect all miners equally, so Roger's point is irrelevant. On the other hand, if the latency factor increases (which it will if we start using 2MB, 8MB, or 20MB as the upper limit), miners will inevitably start to produce more orphan blocks, that is, blocks of transactions that are wasted because another miner's block was propagated to the network first. In order to reduce propagation time, larger blocks encourage miners to become more centralized, because centralized miners can share new blocks with their peers before sending them to the entire network.

Increasing the block size also requires a "hard fork". Because the Bitcoin network needs to reach consensus on each new block added to the blockchain, everyone must run the same software with the same core parameters. Increasing the block size breaks these parameters, so everyone must upgrade immediately or be kicked off the Bitcoin network. Imagine if everyone in the world had to upgrade to the latest version of Windows the moment a new block was released, otherwise they wouldn't be able to communicate with people who were using the new version. How chaotic it would be.

For some reason, Bitcoin has not used a hard fork for a long time. As the Bitcoin network grows, it is also more and more difficult to upgrade the Bitcoin network. Therefore, the core developers prefer to use soft forks, which are upgrades without breaking the core parameters, allowing individuals to upgrade at their leisure, and still allowing them to participate. This approach may seem cautious but I think it is the right way to upgrade. With the efforts of Bitcoin Core members, Bitcoin will soon surpass the blockchain.

Ver’s Starbucks analogy aside, a more appropriate analogy for why block size can’t keep increasing is this: Imagine someone is told to get from Los Angeles to New York in a day. Those who support increasing block size take a “brute force” approach: speed up to 200 mph. But a truly appropriate approach requires better technology. You can fly instead of driving faster. So to complete the blockchain, what’s needed is a lightning network.

A detailed explanation of how the Lightning Network works is beyond the scope of this article (I strongly recommend Aaron van Wirdum's 3-part series for those interested). Long story short, the Lightning Network is another technology built on top of Bitcoin, and it works like a bar bill. Most bars allow customers to open a bill with a credit card, buy as many beers as they want, and pay the bill at the end.
Similarly, you can open a Bitcoin "payment channel" with another person, trade as much as you want (as long as it's within the channel's tolerance), and then close the channel. The only two transactions on the blockchain are opening and closing the channel.

The best part is: imagine your friend also wants to run a bill with the same bartender, you can pay for your friend by putting the bill on your bill and deducting the same amount from your friend's bill. This process is instant, cryptographically authenticated, theft-proof, private (because these transactions are only known to the parties involved and not visible on the public blockchain), can be participated in by an unlimited number of "bartender" middlemen, and avoids the expensive and slow confirmation process of the blockchain, only settling at the last step.

Almost anyone with a home internet connection can act as a middleman, with minimal transaction fees. This is not science fiction, and three independent groups are already working on it. Increasing the block size is a secondary solution that poses risks to decentralization and can only be increased to 2MB or 8MB. However, the Lightning Network can scale Bitcoin to thousands or millions of transactions per second, involving everyone in the world, without any other risks.

It is important to promote the humanization of Bitcoin. Bitcoin developers are experienced engineers and coders, and they certainly understand economics. They have been studying the source code, developing new features, and studying the impact of economic changes for years. You think you know Bitcoin well, but these people know more and think more than you do. You can have a conversation with Peter Todd or Eric Lombrozo for hours on UTXOs, Merkle Trees, Block Headers and other esoteric topics.

Telling these developers why the block size should be increased is like teaching Tom Brady how to throw a football. Most of them support Core and think that the safe way is to keep the block size at 1MB and work on developing more advanced mechanisms instead of using "delaying tactics". Increasing the block size to 2MB will not help, but will only increase fees, but in fact users will bear more costs to run the network because the Bitcoin block reward will be halved this month. It is wrong to keep Bitcoin transactions cheap with large blocks, and cheapness is not what real Bitcoin users want.

Opponents of this view say that they don't want Core experts to run the monetary system, saying that they are like the Fed's economic team. This analogy is wrong. The Fed makes quasi-economic and political decisions that affect everyone, whether or not people choose to participate in them. Bitcoin is a voluntary software project, and if you don't like Bitcoin's policies, you have many altcoins to choose from.

We are libertarians, and we believe that markets (not politics) are the way to test ideas and products. The market has tested Roger Ver’s ideas time and again. The block size advocates launched Bitcoin XT, which was not adopted, and its leading supporter left the Bitcoin space complaining. They launched Bitcoin Unlimited, which was also not adopted. After that, they launched Bitcoin Classic, etc. ... As you can imagine, the result was still not adopted.

So Roger and his friends start acting like politicians, repeating the same things we've heard over and over again. But it's much harder to fool people when it comes to their money than it is in the voting booth. Bitcoin is built in layers, much like the Internet, rather than by recklessly adding pressure to the blockchain. Bitcoin developers, owners, and miners know that increasing the block size will do little good, and that we need a new layer solution like the Lightning Network. If Roger Ver wants to scale Bitcoin so that the Starbucks of the world use Bitcoin, a new layer approach is what he should be working towards.

I am sure Bitcoin will change the world. However, innovation will take decades, and if it happens, it will be decentralized.