While Bitcoin is a decentralized, secure, and trustworthy digital asset, it still has significant constraints that prevent it from becoming a scalable network for payments and other transactions.
Transferring bitcoin on-chain can be a slow, expensive, and inefficient process. This is because the Bitcoin blockchain can only process a certain number of transactions (and data) within a set timeframe. If Bitcoin is to remain competitive with other blockchains, there must be innovations that increase the practicality of the network.
In this article, we will highlight the problem with scaling Bitcoin, and how it can be resolved to greatly unlock additional use cases for the blockchain.
Limitations with Bitcoin’s Protocol
First, we must establish two key elements: Bitcoin as an asset (BTC), and Bitcoin as a blockchain.
Bitcoin as an asset has seen tremendous adoption over the past few years. Today, it is commonly referred to as “digital gold”, and has enormous potential in the future of digital assets.
But for BTC to reach mass adoption, it must have seamless rails for being transacted (aka the Bitcoin blockchain). Bitcoin’s blockchain is highly secure, decentralized, and stable. However, Bitcoin has one distinct flaw: its limited capability for handling large amounts of transaction data.
For Bitcoin blockchain transactions to be confirmed, they must be approved through a Proof-of-Work (PoW) consensus. Once a certain number of miners verify the transaction, it eventually reaches final settlement of the blockchain. This mechanism essentially defines the system for generating new blocks.
In its current state, there are a few key factors that constrain the Bitcoin blockchain:
Block size. One Bitcoin block is limited to holding 1 megabyte (MB) of data.
Block time. A new Bitcoin block is generated approximately every 10 minutes.
Throughput. The restrictions of Bitcoin’s block size and block time make it capable of only processing about three to seven transactions per second.
Transaction Cost. Limited throughput leads to a high demand for a limited supply of block space. This in turn causes fees to skyrocket during times of Bitcoin network congestion.
Programmability. Bitcoin’s scripting language has restricted functionality, making smart contract logic difficult to implement. This also makes creating decentralized applications on Bitcoin nowhere near as simple as doing so on Ethereum.
So why can’t developers just enhance Bitcoin’s performance? Well, making improvements to Bitcoin’s protocol is not that straightforward.
First of all, Bitcoin was purposefully designed to be a simple blockchain. By not having complex coding and applications, Bitcoin has proven to be a highly secure, stable, and decentralized blockchain today. Therefore, making sudden and substantial alterations to Bitcoin would be counterproductive to the protocol’s core principles.
While upgrades to Bitcoin will certainly continue, there will not be any transformative solutions implemented overnight. For that reason, it will be difficult for the blockchain to reach scalability on its own in the near future.
However, there are other solutions that can help scale the Bitcoin network for billions of users and millions of transactions per day.
How Can Bitcoin Scale?
While Bitcoin has its limitations, it can still scale through the implementation of layered solutions that bring enhanced performance and functionality to the larger network.
By building on top of Bitcoin, developers can create scaling solutions without modifying Bitcoin itself. This method improves the performance of regular Bitcoin transactions, all while benefiting from Bitcoin’s liquidity and network effects.
Layers allow bitcoin (and other assets) to be transferred without directly using the blockchain. While each Bitcoin layer has its own unique consensus mechanism for connecting to Bitcoin, the goal is the same: move transactions off-chain to become faster, cheaper, more programmable, and scalable.
Let’s dive deeper to understand the relationship between Bitcoin and these layers.
Bitcoin as a settlement layer
Bitcoin can serve as the ultimate final settlement layer for transactions. It prioritizes stability, decentralization, and security. These characteristics make it the optimal foundation for building a broader range of economic activity atop of. Additionally, its native currency, BTC, acts as a long-term, store of value asset.
Bitcoin layers for scalability and productivity
Bitcoin layers are for experimentation, and expanding the utility of Bitcoin. Since layers are built on top of Bitcoin, they do not affect the base and subsequently pose no risk to it from a security point of view. A layered approach allows Bitcoin to adopt new, faster, and more efficient processes without sacrificing durability or decentralization of the base layer.
Bitcoin layers have a number of advantages:
Faster transaction speed. Transactions on layers can be processed in a matter of seconds and are better suited for Bitcoin users who need more rapid confirmation.
Higher Throughput. Transactions take up less data, leaving more space every new block.
Cheaper transaction fees. A more efficient throughput means low fees.
Added smart contract functionality. Smart contracts with full execution environments allow for the development of decentralized applications. This greatly increases the use cases for Bitcoin, including DeFi, NFTs, and DAOs.
Bitcoin layers also help declutter settlements. Micropayments and small transactions don’t need the full security of the Bitcoin blockchain. Instead, they can be offloaded onto layers, where transactions can be near-instantaneously confirmed for fractions of the cost, and eventually bundled and sent to Bitcoin for final settlement.
Examples of Bitcoin Layers
Currently, there are four main layers that are helping scale Bitcoin.
Lightning Network
The Lightning Network is a layer 2 scaling solution for scaling micropayments and daily transactions on Bitcoin. By using smart contracts and payment channels, two parties can quickly send BTC back and forth for near-zero cost. Payment channels are opened through a Bitcoin transaction, but once open, a channel can host a near-infinite amount of Lightning transactions. When a payment channel is closed, a second and final Bitcoin transaction is executed. The Lightning Network also has a web-like design, with the ability to connect two users indirectly through channels hosted by mutual connections.
Stacks
Stacks is an independent blockchain that brings smart contracts to Bitcoin. Stacks operates 100% off of recycled Bitcoin mining energy, making it remarkably sustainable. Through its Proof-of-Transfer (PoX) consensus mechanism, Stacks blocks are inherently tied to Bitcoin blocks. In addition to anchor blocks which are used to tether Stacks to Bitcoin for finality, microblocks can post thousands of transactions between two Bitcoin blocks, dramatically improving its scalability.
RSK
RSK (Rootstock) is an EVM-compatible sidechain that enables smart contracts for Bitcoin transactions. RSK blocks have about a 30 second confirmation time, and can handle anywhere between 10-20 transactions per second. RSK can scale far beyond Bitcoin, with RSK payments taking up one-fifth of the average size of a standard Bitcoin payment.
Liquid Network
Liquid Network is a sidechain that promotes fast settlement for Bitcoin transactions. The network operates on a consensus similar to Bitcoin’s, but has a centralized structure for the chain’s governance. This allows Liquid to sacrifice some element of decentralization in favor of performance. Liquid decreases block time from about 10 minutes to precisely 60 seconds. Moreover, transaction fees on Liquid average out to about one-tenth of the cost of Bitcoin.
Can Bitcoin Truly Be Scalable?
Scalability is a challenge for all blockchain technology.
In the context of the blockchain trilemma, Bitcoin outperforms every other chain with regards to decentralization and security. By maximizing those two elements, Bitcoin concedes on the scalability front.
The Bitcoin scalability problem is not a simple fix, either. While increasing Bitcoin’s block size limit and lowering block time seems like a great idea, it would come at the expense of the blockchain’s integrity. The Bitcoin core should stay the same, with minor improvements around the edges. A layer 1 can only be scaled so much before it begins to affect its decentralization and security. Any significant modifications and experimentations with the Bitcoin network will be built on top of the blockchain, rather than altering it.
So far, layers have proven to be the most viable Bitcoin scalability solution. By off-loading the on-chain activity to a layer, more transactions can occur, all while being faster, cheaper, and more programmable.
Looking towards the future, these layers will help the entire world use Bitcoin, even if they do not interact directly with the blockchain. Bitcoin scaling is a work in progress, but there is much promise for the growth of current solutions and further proposals coming to the network sooner than later.
