Unit 10 Lecture Notes

According to The World Payment Report 2018 from Capgemini and BNP Paribas, 482.6 billion non-cash transactions took place around the world in 2016 (about 1.32 billion transactions per day). At a predicted compound annual growth rate of 12.7%, this number is expected to reach 690.8 billion non-cash transactions in 2019, or 1.89 billion daily transactions. For simplicity and a nice round number, let's extrapolate a year further and say we'll have 2 billion daily transactions by 2020.

For comparison, the highest daily transaction volume that the Bitcoin network has ever achieved is 490,459, which happened on December 14, 2017. Currently daily transaction count is around 400,000 transactions a day. At current levels of demand and security, Bitcoin can provide on-chain payments equal to 0.026% of global non-cash transactions. Put differently, if Bitcoin is to handle all global digital payments (at 2020 volumes), it needs to increase its transaction capacity by around 5,000 multiples by next year.

Current bitcoin transaction capacity is being achieved at a block size of around 1 megabyte. The naively obvious approach to scaling simply suggests an increase in the size of blocks until they are large enough to accommodate whatever number of transactions is needed for Bitcoin to take over the world. This was the scaling approach favored by the doomed hard fork attempts Bitcoin XT, Bitcoin Classic, Bitcoin Unlimited and Segwit2x. It was also the driver of the doomed Bcash hard fork (as well as its own even more doomed hard fork, BcashSV). The sorry history of all these poorly thought-out attempts is well worth revisiting in depth, and Kyle Torpey has written many articles on their failures. The important conclusion from all these episodes is that increasing the block size is not a workable scaling solution because even relatively small increases wouldn't move the needle, and would come at the expense of a significant increase in the cost of running a bitcoin full node; this would likely reduce the number of full nodes, which is ultimately the only guarantee of Bitcoin decentralization and immutability.

Bitcoin's core value proposition is its immutability enforced by the consensus rules that full nodes run, which ensures its uncensorable nature and hard monetary policy. A block size increase approach to scaling has proved highly unpopular with bitcoiners, and anyone who attempts it will likely end up with a pointless altcoin like the many dozens of worthless bitcoin forks out there. And even if bitcoiners were to adopt much larger blocks, it wouldn't provide the orders of magnitude increase in scalability needed to for Bitcoin to handle all global transactions.

To handle all global transactions, Bitcoin would need to scale to blocks of around 5 gigabytes each, meaning every computer on the Bitcoin network would need to download this much data roughly every ten minutes (and have the hard drive to store all of these massive blocks), which would accumulate at a rate of almost 0.7 Terabyte per day, indefinitely. This is roughly equivalent to the total hard disk space on today's average commercial computer, implying that no commercial computer owners would be able to download the Bitcoin blockchain; only people who could afford highly advanced computers would be capable of running a full node. Such a form of Bitcoin would fail to have a large number of people running full nodes, and as a result it would be under serious threat of capture or centralization. When there are only a few dozen full nodes worldwide, it's relatively straightforward to compromise them directly, or to influence them to change the rules of consensus.

Fortunately, other solutions exist that can increase on-chain transaction capacity while avoiding a blocksize increase. Many of the recent improvement proposals promise more efficient transaction handling. But even with all of these improvements, there are hard limits to how many transactions Bitcoin's ledger can record. No matter what optimizations are performed, the bare minimum needed for a single payment to take place is the data needed for the transaction output, which is still 34 bytes of data per transaction. Assuming 4 Megabyte blocks, even the most theoretically efficient use of block space would translate to around 17 million daily transactions, still a far shout from what would be needed for handling all global transactions.

Since Bitcoin's decentralization is the only thing that makes it valuable, its transaction capacity cannot possibly come at the expense of a reduced number of full nodes. Does this mean that Bitcoin is doomed to never scale and remain a niche network processing a few million transactions a day? I would suggest that this is a highly unlikely fate for bitcoin, because hard money cannot stay niche.