Bitcoin scalability problem
Bitcoin scalability problem exists because of the limits of the maximum amount of transactions the bitcoin network can process. It is a consequence of the fact that blocks in the blockchain are limited to one megabyte in size. So, the current blockchain size is 1 MB, the blockchain scalability problem takes place to be. Bitcoin blocks carry the transactions on the bitcoin network since the last block has been created. In contrast to Visa's peak of 47,000 transactions per second, the bitcoin network's theoretical maximum capacity sits at under 7 transactions per second.
The one-megabyte limit has created a bottleneck in bitcoin, resulting in increasing transaction fees and delayed processing of transactions that cannot be fit into a block. Various proposals have come forth on how to scale bitcoin, and a contentious debate has resulted. Business Insider in 2017 characterized this debate as an "ideological battle over bitcoin's future."
On 21 July 2017 bitcoin miners locked-in a software upgrade referred to as Bitcoin Improvement Proposal (BIP) 91, meaning that the controversial Segregated Witness upgrade activated at block 477,120.
What is scalability?
Before the explaining the meaning of scalability, let's review what fork is and why it is important for blockchain scaling.
A fork (referring to a blockchain) is what occurs when a blockchain splits into two paths moving forward. Forks on the bitcoin network regularly occur as part of the mining process. They happen when two miners find a block at a similar point in time. As a result, the network briefly forks. This fork is subsequently resolved by the software which automatically chooses the longest chain, thereby orphaning the extra blocks added to the shorter chain (that were dropped by the longer chain). A blockchain can also fork when developers change rules in the software used to determine which transactions are valid.
As per CoinDesk, a hard fork is a change of rules that allows creating new blocks not considered valid by the older software.
Bitcoin XT and Bitcoin Classic both proposed an increase in the block size limit parameter called a "hard fork" by Bitcoin Core contributor Eric Lombrozo as a method to improve scalability, however, support for both proposals fell over time. Bitcoin Unlimited also proposes to adjust a block size limit, which may result in a hard fork.
In contrast to a hard fork, a soft fork is a change of rules that creates blocks recognized as valid by the old software, i.e. it is backwards-compatible.
Solution of scalability problem
Various proposals for scaling bitcoin have been presented. In 2015, BIP 100 by Jeff Garzik and BIP 101 by Gavin Andresen were introduced. By mid-2015, some developers were supporting a block size limit to as high as eight megabytes.
- Bitcoin XT was proposed in 2015 to increase the transaction processing capacity of bitcoin by increasing the block size limit.
- Bitcoin Classic was proposed in 2016 to increase the transaction processing capacity of bitcoin by increasing the block size limit.
- In 2016 an agreement of some miners and developers colloquially termed "The Hong Kong Agreement" was made that contained a timetable that would see both the activation of the Segregated Witness (SegWit) proposal established in December 2015 by Bitcoin Core developers, and the development of a block size limit increased to 2 MB. However, both timelines were missed.
- Bitcoin Unlimited advocates for miner flexibility to increase the block size limit and is supported by mining pools ViaBTC, AntPool, investor Roger Ver and Bitcoin Unlimited chief scientist Peter Rizun. Bitcoin Unlimited proposal is different from Bitcoin Core in that the block size parameter is not hard-coded, and rather the nodes and miners flag support for the size that they want, using an idea they refer to as 'emergent consensus.'
- BIP148 was a proposal that has been referred to as a User Activated Soft Fork (UASF) or a "populist uprising." It was planned to be triggered on 1 August 2017, and it sought to force miners to activate Segregated Witness. It became unnecessary because miners opted to vote for SegWit activation using the BIP91 scheme.
Blockchain size and blockchain scalability
There are activated solutions of blockchain and Bitcoin scalability problems.
Segregated Witness (SegWit) is an example of a soft fork. Blockstream co-founder and developer Pieter Wuille proposed Segregated Witness in December 2015. SegWit is an update aimed at solving transaction malleability, a known weakness in bitcoin's security. Segregated Witness is a system by which the signature data is segregated from other transaction data. Segregated Witness has been proposed as a solution for scaling, and has impacts in two ways. A user-activated soft fork (UASF) is a controversial idea that explores how to perform a blockchain upgrade that is not supported by those who provide the network's hashing power. SegWit provides a boost in transaction capacity while remaining compatible with earlier versions of bitcoin software.
Bitcoin Cash is a hard fork of the bitcoin blockchain that was born on 1 August 2017 (since block 478559). After the hard fork, bitcoin holders owned equal amounts of both bitcoin (BTC) and Bitcoin Cash (BCH). Bitcoin Cash increased block size from one megabyte to eight megabytes, without incorporating SegWit. By the evening of 1 August 2017, BCH had the third highest market capitalization of any cryptocurrency (after BTC and Ethereum). Many cryptocurrency exchanges suspended service for the days surrounding 1 August 2017. Americans were wondering whether their acquisition of Bitcoin Cash is taxable as income, or not taxable, as a division of property has received no guidance from the Internal Revenue Service.
Other scaling proposals
SegWit2x was a proposed hard fork of the cryptocurrency bitcoin. The implementation of Segregated Witness in August 2017 was only the first half of the so-called "New York Agreement" by which those who wanted to increase effective block size by SegWit compromised with those who wanted to increase block size by a hard fork to a larger block size. The second half of SegWit2x involved a hard fork in November 2017 to increase the blocksize to 2 megabytes. On November 8, 2017 the developers of SegWit2x announced that the hard fork planned for around November 16, 2017 was canceled for the time being due to a lack of consensus.
The Lightning Network is an in-development project that aims to fix the bitcoin scalability problem by scaling "off-chain". It aims to allow for a microchannel state update without any blockchain usage (in the usual non-adversarial case), making micropayments realistic. Lightning Network will require putting a funding transaction on the blockchain to open a channel.
Of note, the Lightning Network ensures transactions can be spent from before it is signed by all parties, as transactions would need to be signed to get a transaction ID without new sighash flags. This greatly hastens transaction speeds.