The Myth and Solution of Bitcoin Block Capacity Increase

Everything in the world is tangible, has size, and has weight. For example, the Internet is virtual, but bytes are real, and truly measure the size of everything on the Internet. Every trace left on the Internet has a size, such as writing a Chinese character, which is 2 bytes in size; uploading a picture, the size ranges from less than 1k (1k = 1024 bytes) to hundreds of megabytes (1m = 1024k). For another example, if you transfer money with Bitcoin, the size of this transfer record is 125 bytes to 140 bytes. In the Bitcoin network, every 10 minutes, the entire network record is automatically packaged to form a new block. Here, the concept of a block is equivalent to a page of an account book, and the size of each block is currently 1m.

The Myth of Block Size and Transaction Volume

Recently, it is this small issue of block expansion that has caused a huge debate in the Bitcoin community that has lasted for several months. Participants in this debate include core developers, miners, mining pools, and exchanges, and the interests, power, community mechanisms, and community directions are involved.

Back to the concept of blockchain, this is a technology pioneered by Satoshi Nakamoto combining topology and cryptography. This technology is being favored by many financial institutions including the People's Bank of China, and is about to change the global financial structure from the bottom up. Bitcoin is currently the most successful blockchain. Seven years ago, Satoshi Nakamoto designed a block size limit of 1m, which can process 7 transactions per second, and each block can accommodate more than 4,000 transactions. Bitcoin miners access the blockchain by packaging each block, exercising the right to keep accounts, and also receiving a certain amount of Bitcoin as a reward. Blockchain technology perfectly enables Bitcoin to be issued and circulated at the same time.

This year is the seventh year of Bitcoin. As more and more people use Bitcoin, the value it carries is increasing, and the number of transactions is becoming more and more frequent. If every transaction is circulated through the blockchain (onchain), then the number of transactions in the entire network is estimated to be between 10,000 and 20,000 times every ten minutes, far exceeding the current block capacity of 4,000 times. Therefore, there have been calls in the Bitcoin community to expand the Bitcoin block size. How much should it be expanded? The community has several plans, including plans to expand to 2m (bitcoin classic), plans to expand to 8m, plans to expand to 20m (bitcoin xt), and plans to double the block size every year.

The inevitable tragedy after the block capacity increase

The increase in block size, like the butterfly effect, will cause a big change in Bitcoin.

First: Increase the cost of maintaining Bitcoin nodes, thereby reducing the number of Bitcoin nodes worldwide.

Before explaining this point, we need to introduce the concept of Bitcoin nodes. A machine entity that carries the Bitcoin core client and the complete blockchain is called a Bitcoin node. The role of the node is to confirm each Bitcoin transaction, that is, blockchain confirmation. At the same time, the security of Bitcoin is positively correlated with the number of Bitcoin nodes. The more nodes there are, the safer and more available they are. Currently, there are more than 5,700 complete nodes in the world. These nodes are run by Bitcoin mining pools, exchanges, miners, enthusiasts, etc. There is no reward from the Bitcoin system for maintaining nodes. Currently, the lowest cost of maintaining a node is $300. If the block capacity is increased to 2m, the maintenance cost will increase to $600, which will reduce the number of people who maintain it.

Second: A rough hard fork mechanism will cause the community to split.

The current solutions are not compatible with the current Bitcoin client (bitcoin core). If you want to run a new solution, you need to uninstall the original client and then run the new client. This is a hard fork. This will cause Bitcoin nodes to split, resulting in community fission, which is not conducive to the stable operation of Bitcoin.

Third: Narrow the scope of Bitcoin applications.

It is undeniable that Bitcoin is widely used on the Tor network, and is even the only currency recognized by the dark web. The working principle of the Tor network is to randomly select a path through a series of Tor nodes through a very complex protocol and return to the user. In the protocol, the user is also regarded as a Tor node. Through a series of random node jumps, the encrypted information is transmitted layer by layer between routers and finally reaches the "exit node". Therefore, the Tor network is also called a network within a network or a network within a network. Its bandwidth is very limited. If the Bitcoin block is too large, it is very difficult to operate a large Bitcoin node in the Tor network. This is not only an increase in cost, but also a technical limitation. Human nature makes it so. There must be two sides to the pursuit. On the one hand, we pursue an orderly network, and on the other hand, we pursue an anonymous and borderless network. As the currency of the Tor network, Bitcoin has given the Tor network a spontaneous financial system, which is more self-contained. This is true human nature and there is no need to blame it.

A mistake in increasing the block size

Recently, the block capacity increase plan (bitcoin classic) proposed by core developers Jeff and Gavin Andresen has been recognized by well-known bitcoin companies including haobtc, okcoin, bitmain, etc. Even though its client has not yet been developed and announced, its advertised soft fork (compatible with current clients) and 2m size have also reached a broad consensus in the bitcoin community (English community bitcointalk.org, Chinese community bikeji.com), and can be regarded as a conservative improvement.

Yesterday, Jeff, the developer of bitcoin classic, flew from New York to Beijing to hold a communication meeting with Chinese bitcoin companies haobtc, okcoin, and bitmain in the hope of gaining greater support. At the meeting, Jeff said that hard forks are still needed to achieve code upgrades when explaining the bitcoin classic version, and there is no clear plan for long-term development. This caused dissatisfaction among all the members present, and they all said that they would no longer support the bitcoin classic version and that a broader consensus needed to be reached before making a statement.

The solution to the myth

The current contradiction is that if the capacity of Bitcoin blocks does not increase, Bitcoin will cause transaction congestion and the number of people using Bitcoin cannot be expanded; at the same time, if the number of Bitcoin transactions does not increase, the income of Bitcoin miners will decrease, because miners' income = block reward + transaction fee, where the block reward is halved every four years. Now 25 bitcoins are rewarded for mining a block, and the transaction fee is 0.0001 bitcoin per transaction. The reduction in Bitcoin miners' income will hit their motivation for maintenance, which will cause the computing power to decline and affect Bitcoin security issues.

But these contradictions are not unsolvable, and increasing capacity is not the only answer.

First of all, regarding the congestion of Bitcoin transactions, Bitcoin can be regarded as a settlement system rather than a transaction system. The increasing number of Bitcoin transactions can be divided into two categories: one is large transactions that require blockchain proof, which can be circulated on the blockchain (onchain); the other is small transactions and frequent transactions, which can be circulated through Bitcoin wallets or lightning networks (offchain), which can greatly reduce the pressure on the block. In short, Bitcoin will become a real value settlement network rather than a cheap and bloated transaction system.

Secondly, regarding miner rewards, although the block rewards are getting smaller and smaller, and the number of transactions per block cannot double, the transaction fees can be increased. Returning to the profit formula: profit = block reward (halved in four years) + number of transactions (almost unchanged) * transaction fees (increased by market regulation). In this way, the income of Bitcoin miners can be maintained, and their motivation to maintain computing power can be maintained, so that the computing power can grow steadily and the Bitcoin network can be stronger.

The key to this solution is to use Bitcoin as a settlement system rather than a transaction system, which is different from the inherent concept of many people. As for whether Bitcoin can develop in this direction, it depends on the balance of interests among the Bitcoin community.