The launch of Bitcoin in 2009 introduced a new financial system that embraces decentralization. On the most basic level, this digital currency allows users to trade without the intervention of banks and other financial systems. Instead of using banks, Bitcoin’s network leverages miners who work on verifying transactions. This decentralization aspect and privacy and security make it an attractive asset to global investors.
While that may be the case, a growing number of users in the Bitcoin network can slow down trading operations. Due to its popularity, the coin’s network gradually faces scalability concerns since millions of users hope to get a slice of the action. The following piece, therefore, plans to expound on whether the Bitcoin network can scale and accommodate more users in the long run.
The Scalability Problem
In the blockchain field, scalability represents a network’s ability to handle a growing number of transactions. It mainly focuses on the rate at which blockchain participants process and store transactions. Therefore, as Bitcoin’s user base grows, it becomes challenging to maintain a fast trading system.
Bitcoin currently has a lower transaction capacity than other payment providers in the traditional market. For instance, Visa and PayPal handle close to 1,700 and 115 transactions per second (tps). On the other hand, Bitcoin’s network can only manage seven transactions per second.
At this rate, the coin’s network will eventually become overloaded when dozens of trades occur within that time frame.
How the Network can Scale
Due to the backlog, miners on the blockchain resort to verifying specific transactions. Thus, users will handle their transactions faster when they pay additional trading fees. Such a scenario creates an auction-like system where nodes (miners) prioritize trades.
In that case, how can this ecosystem scale and become a global payment network? Below are examples of the existing solutions to address Bitcoin’s scalability concern.
Segregated Witnesses
Segregated Witness, or SegWit, is a technical improvement to the Bitcoin network that came to light in August 2017. SegWit aims to increase the capacity of the Bitcoin blockchain by separating witness data (also known as transaction signatures) from the block data.
Before SegWit, transaction signatures were included in the same data structure as the transaction data. Hence, the size of each block on the blockchain was limited by the size of the block data structure, which was capped at 1 megabyte. This limitation on block size resulted in scalability issues for the Bitcoin network, as it could only process a limited number of transactions per block.
Leveraging the SegWit approach ensures the transaction signature data is separated from the transaction data and stored in a different data structure called the witness. This approach allows a considerable number of transactions to be included in each block, as the size of the transaction signatures no longer limits the block size. Additionally, SegWit introduces a new transaction format that removes certain data from the transaction, further increasing the capacity of each block.
Overall, SegWit aims to improve the Bitcoin network’s scalability by increasing each block’s capacity and allowing more transactions to be processed per second. Many Bitcoin exchanges and wallets widely adopt the solution, which is considered an essential step in the evolution of the Bitcoin network.
The Lightning Network
The Lightning Network is a layer built on the Bitcoin blockchain that allows for near-instant and low-cost transactions. It operates by creating a network of payment channels between participating nodes. The channels route payments to their destination without needing each payment to be recorded on the blockchain.
To create a payment channel, two parties deposit an equal amount of Bitcoin into a multi-signature (multi-sig) wallet, which is essentially a special type of Bitcoin address that requires the signatures of both parties to spend the funds. Once the channel is open, the parties can make as many transactions as they like with each other without the need to broadcast each transaction to the network. When everything is complete, they can close the channel, and the final state of the channel goes to the blockchain.
The Lightning Network allows these payment channels to be connected to create a network. That way, payments can be routed from one party to another through multiple channels. Ultimately, payment can be sent from one party to another without the need for the two parties to have a direct payment channel open between them.
The Lightning Network plans to improve the scalability of the Bitcoin network by allowing for a large number of transactions to be made off-chain. In return, it reduces the burden on the blockchain and promotes near-instant and low-cost transactions.
Horizontal and Vertical Scaling
Horizontal scaling in Bitcoin refers to increasing the network nodes to improve the system’s overall performance and capacity. This process adds more computers or servers to the network, which can handle more transactions and process them faster. Horizontal scaling can be done incrementally as the demand for the network increases. It allows the system to scale horizontally without changing the existing infrastructure.
Vertical scaling in Bitcoin, on the other hand, refers to increasing the capacity of individual nodes by adding more resources, such as memory and processing power. This approach can improve the performance of individual nodes, but it has limitations in terms of scalability.
As the demand for the network increases, vertical scaling becomes less effective because it requires upgrading all the nodes in the network. As a result, this process can be costly and time-consuming.
Both approaches help improve the performance and capacity of the Bitcoin network. Nonetheless, horizontal scaling is generally considered a more scalable and cost-effective solution.
Conclusion
Bitcoin’s network can scale up and accommodate more trading activities. Today’s solutions allow the coin’s blockchain to achieve progressive transaction verification results. Such innovations help keep the global adoption dream alive as the Bitcoin community develops more sustainable solutions.