Bitcoin hard fork increases block size by 1MB to treat the symptoms but not the root cause. Segregated Witness is the ultimate solution

After the Brexit referendum, many financial news media have begun to recognize that Bitcoin is becoming an increasingly credible safe-haven asset. Institutional investor Daniel Masters believes that Bitcoin is ready to enter its golden period, and its market value is hovering around $10 billion after a series of growth.

But as bitcoin’s price and investment prospects continue to rise, one question looms over the decentralized network behind the digital currency: Can bitcoin scale to solve the pressures of adoption it faces?

Given the current trajectory, some people don't think so.

The underlying technology of Bitcoin is blockchain technology. Blockchain contains all recent transactions on the Bitcoin network. These blocks are confirmed every 10 minutes, and the size of each block is currently limited to 1MB.

The problem? The average block size is approaching this limit, and some blocks have already reached it, causing extra transactions to be pushed into subsequent blocks. As a result, there are delays in transaction confirmations and high transaction fees, which makes many people in the Bitcoin space very anxious.

Therefore, how to expand the capacity of Bitcoin has become the most controversial issue in the industry.

Although, Bitcoin Core developers have outlined a plan, some believe that more direct measures are needed. The coming months will see the steps taken solidified, so it will be important to explore whether a more direct approach is needed for the continued success of Bitcoin.

How should Bitcoin scale?

The dream of Bitcoin evangelists is that the currency will one day end the world’s shuffle of sovereign fiat currencies and become the primary means of executing all transactions.

These are lofty goals, and to have any chance of achieving them, Bitcoin needs to first address its very real technical limitations. While Bitcoin is a reliable and easy-to-use currency, the fact is that the Bitcoin payment network accounts for a very, very small share of global transactions.

For example, during the 2013 holiday season, the Visa network was able to process a peak of 47,000 transactions per second.

Compared to a single centralized payment processor like Visa, the Bitcoin protocol can only process a handful of transactions per second. Clearly, to achieve its ambitious goals, Bitcoin needs to increase its transaction throughput by an order of magnitude. The easiest way to do this is to increase the current 1MB block size limit. But it’s also the worst way.

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

“If we use an average of 300 bytes per Bitcoin transaction and assume an infinite block size, then to reach Visa’s 47,000 transactions per second, the Bitcoin block size would need to be around 8GB. This would amount to over 400 terabytes of data generated per year.”

These numbers tell us that simply increasing the block size cannot be a long-term plan for Bitcoin expansion.

Any increase will put more centralization pressure on the backbone of the Bitcoin network: miners and nodes. Without a strong distributed network, Bitcoin will be more vulnerable to censorship and attacks. In other words, increasing the block size will make a consensus trade-off between decentralization and performance.

However, Bitcoin’s decentralization remains its greatest feature, as it underpins its immutability and censorship resistance. Without these features, Bitcoin would be little more than a cumbersome and expensive PayPal. So if Bitcoin can scale without sacrificing decentralization, then this approach is clearly desirable.

This is why we need long-term scaling solutions that address the core issues.

Currently, the Bitcoin network cannot be effectively expanded. Therefore, the way the network itself operates needs to be optimized. This optimization can be done through the method of Segregated Witness (SegWit), which can simplify the way blocks process transactions and improve transaction efficiency without increasing the block size.

SegWit also lays the foundation for future upgrades that could modestly and significantly increase Bitcoin’s transaction throughput.

Other concepts, such as the Lightning Network and sidechains, could also improve Bitcoin without changing the block size.

Won’t a 1MB block size limit hurt Bitcoin adoption?

Even as SegWit is being tested and various top protocol implementations are being developed, some are eager to insist that the problem is that blocks are approaching fullness.

The current debate is roughly this: as blocks approach their maximum capacity, transactions take longer and transaction fees rise. These problems mean less adoption of Bitcoin, and less adoption means the network is shaky and Bitcoin is dying. Therefore, we need a hard fork to increase the block size to at least 2MB, directly increasing Bitcoin's transaction capacity, while at the same time, developing a long-term solution.

But increasing the block size, even slightly, would pose security risks and the process would be cumbersome.

In this case, the only reason to move forward with a hard fork is unless it can be demonstrated that as 1MB becomes fuller, it will actually significantly hinder Bitcoin's short- and medium-term adoption. Otherwise, a hard fork would not be done.

Less remaining capacity on average means higher fees, which can indeed lead to slower transaction confirmation times on the network if these fees are not met.

From the perspective of Bitcoin evangelists, it is easy to see that this will hurt Bitcoin adoption. If new consumers are faced with severe transaction confirmation delays when using Bitcoin for the first time, then users are likely to stop promoting Bitcoin technology because it does not hurt Bitcoin adoption as advertised.

These are relatively small transactions, so they will be affected by the reduction in block size. The problem is that this situation is still largely unrealistic.

Bitcoin still has a long way to go before it can be easily obtained by every consumer through their mobile phones and accepted as a serious payment option by Apple Pay or Venmo. In fact, Bitcoin performs very poorly in these use cases. The reason is simple: price volatility.

In daily life and spending, normal consumers will not give up using a more stable and accepted currency in favor of a currency whose price fluctuates wildly.

The mainstream media is waking up to the fact that Bitcoin’s current growth is undoubtedly primarily due to its use as an investment and speculation vehicle. These types of transactions tend to be of greater value than retail.

This corresponds with Tradeblock’s figures, which show that the average daily Bitcoin trading volume between May 27 and June 25 was 12 to 14 BTC, far greater than any possible retail Bitcoin trading volume.

Bitcoin doesn’t need to beat instant credit card transactions and stable purchasing power in this regard. It just needs to beat traditional bank transfers and wire transfers, and the performance of comparable assets.

As Bitcoin becomes a sought-after investment commodity, its market value will rise. Its price volatility should decrease, making it increasingly viable for regular consumers.

At this point, reliable, fast, cheap small transactions will become more important for growth. But this won’t happen in the next few months. Or even when the Lightning Network is successfully deployed.

This is because breaking the dominance of fiat currencies is a long process. True Bitcoin evangelists will wait for a long time.

Those evangelists who argue that a block size reduction will hurt or even kill Bitcoin adoption in the short term are overgeneralizing. They want to see Bitcoin become popular, but mistakenly believe that Bitcoin’s first phase of growth depends on mass adoption.

In fact, even if Bitcoin throughput is not a problem, the mass adoption of Bitcoin is still a long process. The public will not drive the growth of Bitcoin. Investors and speculators will bear the main responsibility for the growth of Bitcoin.

The block size increase will eventually come, but its contribution to scaling will be minimal. A hard fork will not bring anything but illusions of growth and more headaches for Bitcoin Core developers.

Blockchain scaling is not an easy problem to solve and can only be solved through a slow, steady, and creative approach.

There is currently no reason or evidence that continuing with a 1MB block size will immediately hinder Bitcoin adoption.