The emergence of cryptocurrencies and blockchain technology may prove to be almost as significant an innovation as the internet itself. Blockchain offers a mechanism for the mediation of any transactions that previously would have required trusted third parties, while cryptocurrencies such as Bitcoin may eventually become a significant alternative to traditional “fiat” (e.g., government-backed) currencies. These technologies could eventually revolutionize the global banking infrastructure which has underpinned global commerce for centuries.
Many cryptocurrencies exist, but the original Bitcoin cryptocurrency has the largest capitalization: The world supply of Bitcoin is currently worth about $44 billion. The blockchain network underlying Bitcoin’s blockchain performs five “petahashes” per second—that’s 5 million, trillion hashes calculated per second performed by about 7,000 servers.
Despite this enormous computing capability, the blockchain network is only capable of processing a small fraction of the number of transactions processed by traditional systems such as VISA. Bitcoin’s “proof of work” algorithm requires massively parallelized attempts to solve a complex mathematical puzzle. The node that solves the puzzle first is rewarded with Bitcoin. Every computer on the network competes to solve the problem, but only one ultimately succeeds—the rest of the CPU consumed is effectively wasted. Bitcoin advocates would argue that this is the price we pay for a tamper-proof immutable chain.
Alternative blockchains with their own cryptocurrencies have emerged to compete with Bitcoin. Litecoin offers fast transaction times with support for micro-transactions while Ethereum offers programmable “smart contracts” and the ability to create customized coins or “tokens.” These additional currencies threaten Bitcoin’s dominance unless Bitcoin’s scalability problems can be addressed.
In the long term, there are multiple proposals to improve scalability of blockchains in general and Bitcoin specifically. These included sharding-like approaches that improve the parallelism of the overall network and changes to the core consensus algorithms—replacing the computationally expensive proof of work algorithm with the much cheaper proof of stake, for instance.
However, in the short term, there are two competing plans to provide immediate scalability improvements for Bitcoin: Segregated Witness (SegWit) and a larger block size.
Fully understanding SegWit involves some complex Bitcoin internals, but in brief, it separates the transaction cryptographic proof from the transaction details itself. This speeds processing and reduces the size of the transactions. Increasing the block size is conceptually simpler—by increasing the size of the block, more transactions can fit in each block, and, hence, transaction throughput is increased.
The block size solution is favored by Bitcoin “miners” (those who own the Bitcoin hardware) because it will increase the hardware requirements for Bitcoin mining and thereby centralize power in the hands of the bigger investors. SegWit tends to be favored by Bitcoin programmers as a more “democratic” solution.
Until recently, there was a significant impasse between the two proposals. A 95% consensus is required for a universal change to consensus algorithms, and in the absence of this agreement, it’s almost impossible to address the current scalability issues.
Recently, a compromise solution—SegWit2x —was proposed which, at the time of this writing, appears poised to succeed. SegWit2x proposes that should 80% of the Bitcoin network adopt SegWit, then within 6 months, the Blockchain block size will be “hard-forked” to 2MB. At the time of this writing, more than 80% of the network is signaling support for SegWit2x, and hence it’s likely that the proposal will succeed.
However, the creators of the most widely use Bitcoin client—Bitcoin core—have objections to SegWit2x. Should the client not be updated with SegWit2x support, then the Bitcoin network may still fork into two competing currencies.
The issues with the Bitcoin network involve serious technical, economic, and sociological problems. My personal belief is that blockchain and cryptocurrencies are a big part of our civilization’s future technology stack. How big a role Bitcoin plays in this future may well be decided by the outcome of SegWit2x.
(August 1, 2017)
Time moves fast in the Bitcoin world, and since this article was first written, some significant updates have occurred. As of July 31st, Segwit2x has entered its “lock in” phase and appears almost certain to be in effect by August 8th. Meanwhile, a consortium of miners have announced an intention to “hard fork” the Bitcoin blockchain, creating a new Bitcoin called “Bitcoin Cash” (BCC) which will have a much larger blocksize than original Bitcoin. Most observers believe that the amount of mining power will be a small fraction of the main Bitcoin networks power, and that the new coin will become one of the minor cryptocurrencies. I tend to agree, though it is remotely possible that the new coin will find a niche and the more powerful blockchain will gradually gain traction.
Regardless of the emergence of Bitcoin Cash, the adoption of Segwit2x has been recieved with great joy in the wider Bitcoin community and is expected to lead to a resurgence of interest in Bitcoin specifically, and in blockchains and cyrtocurrencies generally.