Co-author: Ming

Bitcoin, as one of the representatives of cryptocurrency, has transformed the way we think about payment and economic. The underlying technology namely blockchain enables information to be securely shared over a decentralized, peer-to-peernetwork. In this article, I will introduce the background information of blockchain and demonstrate the gap between Bitcoin and the mainstream payment processors.

A blockchain can be treated as a ledger of facts, replicated across multiple computers and shared over the distributed network. When joining in the blockchain system, one needs to download a full copy of the blockchain which recorded the transaction history from the very beginning. Thus, it enables every individual in the network to check the correctness of the fact at any point of the past. New transactions need be added to a newly mined block, and the block is then published to all nodes in the blockchain network. At this point, those new transactions are confirmed.

The blockchain technology was first applied in Bitcoin[1]. With the increasing adoption of Bitcoin, the scalability bottleneck of Bitcoin has raised many people’s concerns. Date back to 2010, in order to prevent the spam attack on the Bitcoin network, e.g. a block with 10GB size, Satoshi Nakamoto set a threshold of the maximum size for new blocks to be added to the blockchain[2]. The threshold is the famous 1MB block size. The 1MB block size limit has brought many controversies in the Bitcoin community regarding to the scalability issue and the fee market.

  • Scalability

    Bitcoin’s 1MB block size threshold results in a huge capacity differences compared to the mainstream payment processors. Due to the 1MB maximum block size constraint, the maximum throughput of Bitcoin network is 7 transactions per second[3]. In contrast, the mainstream payment processors such as VISA processes 2000 transactions per second, with a peak capacity of 56000 transactions per second[4]. Other examples such as Paypal allows 115 transactions per second in 2014[3]. Furthermore, through the mining mechanism, Bitcoin generally takes 10 minutes to publish a new block, which indicates the time for confirming a transaction will normally be 10 minutes or longer[5]. Nevertheless, VISA confirms a transaction within seconds (See Table).

      Transactions per second Latency (Time for confirming a transaction)
    VISA Credit Card 2000 (Peak rate can be 56000) Within seconds
    Bitcoin 3.7 ~ 7 10 Minutes


    With the huge gap between the Bitcoin and existing payment processors, the demand of improving the capability of Bitcoin is increasing. The scalability of blockchain has became an active research field. The block size limit is considered as one of the major factors that influences blockchain to scale, because intuitively a big block size means more transactions can be confirmed within the each 10 minutes interval.

  • Fee Market

    There is an open debate of whether the block size limit should be increased in the Bitcoin community. A great contention is that a low block size limit can enable the fee market to develop[6]. As a low block size limit would require higher transaction fees for fast confirmations, this would greatly motivate miners[6]. While on the other hand, Bitcoin users may need to pay high fees for a faster confirmation, which would make Bitcoin no longer attractive for new participants[6].

By the time writing this article, the 1MB block size of blockchain has a significant constraint on the performance of Bitcoin. In order to enable Bitcoin to match the capacity of the mainstream payment processors, the need of increasing block size limit is growing. However, increasing the block size limit would raise other concerns, such as the development of Bitcoin’s fee market, and whether the Bitcoin network can support a larger block size[2].

Reference

  1. Brito, J., & Castillo, A. (2013). Bitcoin: A primer for policymakers. Mercatus Center at George Mason University
  2. Peter, R. (2015). A Transaction Fee Market Exists Without a Block Size Limit.
  3. Scalability - Bitcoin Wiki.
  4. Visa Inc. at a Glance.
  5. Croman, K., Decker, C., Eyal, I., Gencer, A. E., Juels, A., Kosba, A., … & Gün, E. (2016, February). On scaling decentralized blockchains. In Proc. 3rd Workshop on Bitcoin and Blockchain Research.
  6. Block size limit controversy