Bitcoin has a scalability problem. The problem is that the blockchain can handle only about seven transactions per second. Unless something changes, this will result in slow transaction confirmation times and high transaction fees until the limit is reached. The best way to solve this problem is through hardforks.

The combination of a hardfork and an upgrade will help increase the block size limit to accommodate more transactions per second. However, there are several roadblocks to this happening: For one, SegWit adoption has been sluggish. As of right now, only about 10% of bitcoin miners have upgraded their machines to support it.

Moreover, most Bitcoin users don’t see the need to change their habits because they are satisfied with transactions being confirmed in less than ten seconds these days. For another, even if a majority of miners did adopt SegWit, it wouldn’t solve all the scalability problems just yet.

There are still problems left that can’t be solved with a hard fork alone. In fact, some of them will get even worse due to new attacks that could be prevented with an upgrade as well as other solutions being proposed by developers and businesses alike.

What is Scalability?

The idea of scalability is to make sure that blockchain transactions can be handled by the system without increasing the block size. When a business sends money to another business, the recipient’s bank sends the money to the bank holding the funds in the first business.

Then, the first business takes that money and uses it to pay its suppliers. The same goes for customers. When a person makes a purchase, their bank will send the money to the seller’s bank. Then, the seller’s bank will send the money to the bank holding the funds in the intended recipient.

The problem with this setup is that every time a user makes a transaction, the entire network has to agree on the amount of money transfer and its destination. Given the high transaction volume on the blockchain, this takes time. In the meantime, the recipient could go into default and lose the funds. A blockchain without scalability is like a highway without lanes.

The system peels off some of the most used capacity and creates “lanes for the less used.”

The Bitcoin System

The Bitcoin system works because everyone is part of a larger network. When someone makes a transaction, their data (transaction fee, amount of money sent, and destination address) is broadcast to the network. Then, other members of the network can see that data and become part of the transaction, thereby confirming the transaction and adding it to the blockchain. If everyone on the network confirms a transaction, the system “works.”

However, this model has one big problem: scalability. The blockchain network can only process a maximum of seven transactions per second. Unless the maximum is increased and more capacity is added to the system, the blockchain network will become unprofitable very soon.

To solve this scalability problem, the Bitcoin system adopted a hybrid model that mixes elements of both the distributed ledger and centralized clearinghouse systems.

Bitcoin: The decentralized payment system

One of the biggest drawbacks of the blockchain system is its centralized nature. The blockchain network is owned and operated by a few companies. Users are only able to make transactions using the approved software, which means that only certain types of activities can be done on the blockchain.

Furthermore, the blockchain system is not decentralized in the sense that data management and consensus operations are centralized. For example, all the nodes on the blockchain must be connected to a single server to function as a whole unit. This single unit is called a “node.”

And each node is only allowed to participate in the blockchain network if it is connected to other nodes. All these facts clearly demonstrate that the blockchain network is not decentralized, but centralized.

SegWit: The solution to all problems?

On the bright side, the centralized blockchain network can be replaced with a decentralized one. This, however, raises two more problems: scalability and regulatory compliance. To start with scalability, the Bitcoin system only deals with money transactions.

In order to support other types of operations, such as online payments, a new blockchain type called the “virtual blockchain” must be developed. The virtual blockchain, however, is far from being ready. Moreover, regulatory compliance remains a huge issue.

The EU’s new financial regulations, for example, call for a “national living standard” level of income for all its members. This requires each person to have access to an internet-connected computer at home. However, most people don’t have one of those. So, until the entire country is connected to the internet, basic services like online payments will remain out of reach for many people.

How SegWit Merged Mining and Segregated Witness transactions work

When a user makes a transaction, their data is sent to the blockchain and then confirmed by other members of the network. Because the transaction is public, other members of the network can see it. They can see the amount of money transferred, the address of the recipient, and other details.

As a result, the recipient has an idea about who the sender is. This information can be used to track down the person and force a response from them. However, in order to settle a dispute, two parties can try to settle their transaction using “segregated witness” transactions. A “segregated witness” transaction is private, meaning that no other members of the blockchain network can see that data.

The data is then included in a block and added to the blockchain. If the transaction is successful, the block is added to the blockchain and the stage is set for a “difficulty adjustment” to lower the price of future blocks.

BIP 91: Gives miners the ability to adjust block size

As noted earlier, the core problem with scalability is that it is a network problem. The network has to be able to process a maximum of seven transactions per second. The miners have to be able to agree on an appropriate block size and provide processing power to the network.

However, at the same time, miners are trying to defend the network against attacks and maintain its security. Therefore, in order to protect the network, miners can adopt a “BIP 91” compromise. BIP 91 is a consensus-based decision-making process where miners are divided into groups and each group determines whether the block they are about to generate meets the consensus criteria.

If a majority of the group agrees that the block passes the criteria, then the block is added to the blockchain and the process is repeated until all blocks are added to the blockchain.

BIP 112: Increase transaction capacity with Winchester congestion fee

Segregated Witness transactions use a large amount of blockchain capacity. As a result, they can take a long time to settle. A solution to this problem is to charge a “Winchester congestion fee” that is added to all transaction outputs. The fee is the same amount that the blockchain would charge for the output if the transaction were to settle.

In this way, the transaction is incentivized to settle quickly. If the transaction takes longer than 30 seconds to settle, then the fee is added to the blockchain and the blockchain fee is collected. If the transaction is still unconfirmed after 30 seconds, the user gets a refund.

BIP 14: Avoid chain splits by enforcing network rules

The blockchain network is decentralized and distributed. The consensus-based process that it uses to settle transactions is public. It is decentralized because it is not run by banks or other large institutions. It is distributed because it is run by people. Chain splits occur when the network cannot reach a consensus on a block.

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