Bitcoin’s Scaling Problem
Bitcoin relies on a blockchain to process payments. However, currently, Bitcoin’s blockchain can only process 7-10 transactions per second. In a world with nearly 8 billion people, this is not enough throughput for Bitcoin to serve as the global currency.
Some of Bitcoin’s earliest adopters, including Hal Finney, the receiver of the first Bitcoin transaction, have already identified this scaling problem. The Bitcoin community has come up with a wide variety of solutions to deal with these issues. Bitcoin will scale through a combination of several of these proposals.
How Bitcoin Will Scale
Bitcoin is both a decentralised digital token and a distributed network. Bitcoin, the token, is transferred between users while the distributed network processes and monitors the transactions’ history using a blockchain database.
Bitcoin tokens, nevertheless, can be transferred outside of the blockchain via other networks and protocols. This enables Bitcoin to scale and host the massive payment throughput required for Bitcoin to become the world’s dominant currency.
Bitcoin can be scaled in two ways: the blockchain can be upgraded to increase throughput and additional networks known as layers can be created to facilitate Bitcoin transfers without using the blockchain directly.
Scaling the Bitcoin Blockchain
Bitcoin blocks are generated every 10 minutes on average, and each block can only contain a limited amount of transactions. This is why the Bitcoin blockchain can only process 7 to 10 transactions per second.
The block time or the 10-minute interval between Bitcoin blocks was set when Bitcoin was created and is unlikely to change in the future. The size limit for each block, on the other hand, has changed several times. In 2010, Satoshi Nakamoto established the rule that no block could be larger than 1MB in size. That limit was changed in 2017 with the SegWit upgrade, which increased it to 4MB. However, most Bitcoin blocks are still around 1.3MB in size.
The Bitcoin network sets these limits to prevent the size of the blockchain from growing too rapidly so they will not likely change in the future. As a result, most attempts to help the Bitcoin blockchain scale concentrate on reducing the amount of data required in Bitcoin transactions. For instance, the Taproot update enables more efficient transactions that consume less space within a Bitcoin block.
Layered Scaling Solutions
Efficiency improvements to the blockchain are incremental, so they can’t provide a comprehensive solution for scaling Bitcoin to the billions of users who need to be onboarded. This is why we need additional methods for transferring Bitcoin.
A layer is simply a network that allows users to use Bitcoin. Layers enable Bitcoin blockchain transactions to represent or settle large batches of payments. Layers connect with the blockchain but do not broadcast every transaction to the blockchain, thereby reducing transaction fees and enabling faster settlement.
The Lightning Network
The Lightning Network is the most notable layer on top of Bitcoin’s blockchain (LN). The Lightning Network enables micropayments and small daily transactions that are no longer feasible on the Bitcoin blockchain. Lightning allows instant, free or nearly free payments between parties via channels.
Lightning channels are opened and closed using regular Bitcoin transactions and the blockchain; however, it can execute a limitless amount of Lightning transactions once a channel is open.
The Liquid Network
Some layers employ their own blockchains rather than Bitcoin’s. Liquid Network employs a blockchain similar to that of Bitcoin but Liquid is governed by a group of entities and is not completely decentralised. Liquid can guarantee low fees and quick settlement by foregoing decentralisation.
Unlike the Lightning Network, which uses Bitcoin as its native token, the Liquid Network creates its own token to represent the real Bitcoin deposited by a user.
Additional Layers on Top of Bitcoin
In the future, additional layers will be added to Bitcoin. Users will be able to transact in bitcoin without having to pay the exorbitant fees required to use the blockchain itself. These improvements in the Bitcoin protocol as well as innovative new layers on top of Bitcoin’s blockchain, will allow the Bitcoin network to support billions of daily transactions, from tiny micropayments to multinational settlements.
