Bitcoin’s price has risen from $750 to $1060 in the past month, which has created a huge surge in activity. Unfortunately, this activity has caused the network to stagnate, with many transactions taking several hours to confirm.
The source of the stagnation stems from a technical limitation of the Bitcoin network. Bitcoin’s public transaction record, known as the “blockchain”, is made up of a series of blocks published by different entities through a process known as mining. These blocks are created at an average rate of one per 10 minutes. The size of each block is capped 1 Megabyte, a limit originally created to prevent malicious entities from creating unnecessarily large blocks, which could make the blockchain too large for most users to download and store. This limits Bitcoin to approximately 3-4 transactions per second, which is insufficient for it to fully replace credit card networks or other transaction methods.
This limit is beginning to limit Bitcoin’s growth as a currency. While Bitcoin provides enormous potential, such as protecting people from hyperinflation in countries such as Venezuela, and providing a secure and private transaction protocol, the 1 MB cap is preventing it from seeing widespread adaptation. Bitcoin recently adapted “dynamic fees” which adjust the fee that someone sending Bitcoins pays to have their transaction confirmed in a block. As traffic continues to rise, fees continue to rise, as users are competing for limited block space. If fees grow too high, it eliminates Bitcoin’s feasibility for day-to-day transactions.
I recently purchased a bit of steam wallet funds with Bitcoin to test the network. With a fee of 0.12 mBTC, the default fee with the wallet I used(approximately $0.13) I’ve been waiting over two hours, and lack a confirmation. The transaction can be viewed here. The transaction was sent at 2:48 AM central US time.
Currently, as of 4:53 AM US Central time, there are over 26,000 unconfirmed transactions waiting to be confirmed in a block, with a size totaling over 13 Megabytes, meaning that it will take over two hours for the system to catch up, assuming no more transactions are sent. However, at the current rate of transactions, the size of the queue only grows, meaning wait times do as well.
Solving the Block Size Limit Problem
Unfortunately, the block size limit cannot be adjusted without creating a “fork” in the network, essentially splitting the network, and hoping everyone agrees on which is the “real” Bitcoin network. Since Bitcoin is a decentralized currency, it’s very difficult to get the community to reach consensus on a network fork. There are many different proposals on how to solve the issue, and it is a very controversial issue within the Bitcoin community.
Some advocate a 2 Megabyte cap, as it is a small change, but many disagree because it’s simply kicking the can down the road, and we’ll see the same problem happen later. Some advocate increasing the cap, and creating a determined schedule at which further increases to the cap occur. Many disagree with this because it makes dangerous assumptions about growth in internet infrastructure, and the ability for large blocks to be reliably transported. Some support a dynamically scaling block size caps based on median block size, although some worry about the potential for this to be abused.
Ultimately, the only way that Bitcoin could undergo such a significant change would be for all of the industry leaders, such as exchanges, transaction processors, and mining groups, as well as a significant majority of users, to agree on a specific change and date of implementation(at a specific block number). Even once an agreement is made, such a change would likely take years, as developers of custom Bitcoin applications will need sufficient time to refine their code base to support the new changes, and test thoroughly.
One effective way to reduce risk when implementing a fork is to schedule it for a block several months or a couple years in the future, but only on the condition that a given percentage of blocks mined within the past few months of blocks contain a marker in support of it. Since blocks can contain non-transaction data, miners that support a given change to the network could contain a specific marker indicating their support.
Overall, Bitcoin has enormous potential, but the community and industry will have to find a way to address the transaction size issue in order to create a widely used transaction medium. If Bitcoin fails to improve it’s capacity, it’s possible that an alternative cryptocurrency could fill a niche for smaller transactions. This ultimately would depend on major Bitcoin payment processors such as Bitpay or Coinbase providing support for alternative currencies. While it’s unclear what the future for Bitcoin and cryptocurrencies will hold. What we do know is that they carry significant potential, and that any sort of prediction is pure speculation.