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The limitations of bitcoin and the scalability problem

The limitations of bitcoin and the scalability problem

Much has been written about the benefits of cryptocurrencies such as bitcoin and blockchain technology. Without a doubt, blockchain technology will change the world. Not surprisingly, one of our recent guests from the University of Francisco Marroquín, Nick Szabo, called blockchain technology “a financial Napster.” While we see the number of cryptocurrencies and blockchain technologies, we need to go beyond the bitcoin craze and understand the barriers that those technologies face to identify the opportunities they offer.

The fashion of Bitcoin

We can summarize the list of psychological bias that explains why bitcoin fans are in love with this technology, underestimating the many challenges it brings:

  • Confirmation effect.
  • Drag effect (get on the car)
  • Ostrich effect
  • pro-innovation bias
  • Etc.

This leads some bitcoin fans to ignore the difficulties they may face in the future. While some are taken aback by these biases, the power of bitcoin and blockchain technology cannot be denied.

There are obvious scalability limitations in Bitcoin, routed directly to the Proof-of-Work consensus algorithm. With increasing concerns on environment preservation and conservation, alternate consensus algorithms must be designed, says – Bohdan Prylepa, CTO of Prof-it Blockchain Ltd and COO in Bitcoin Ultimatum. He also mentioned that “I’m particularly interested in the one that places the end-use at the center. There are several models present, but the one that combines Leased Proof-of-Stake (LPoS) and Proof-of-Authority (PoA) dubbed UPoS appear robust without compromising security or impacting decentralization.”

If you have ever passed around the world, you will know that the global payments industry is one of those that faces the greatest need for change: the process takes days, the absence is obvious, and often fails. There are many mediators, and the costs are high. Currency exchange is expensive. Approximately $ 300 trillion in foreign exchange is generated annually, providing a bank account of between $ 150 and $ 200 billion (source: CryptoCoinsNews). It is a sector that will be disrupted by financial innovation. The doubling of bitcoin be disrupted by financial innovation.

The doubling of bitcoin

The problem with the bitcoin paradise? Bitcoin is facing serious problems. As the volume of transactions in bitcoin increases, the blockchain becomes longer and longer. Over the years, a large number of transactions have been collected, and this has led to the following:

  • Long transaction times
  • Currently, it takes about four hours to process a transaction. As the volume increases, transaction times will increase.
  • High transaction costs
  • To get a quick transaction, the most important discovery in the authentication process, a bitcoin user can offer a payment. As transaction history continues to grow and transaction times increase, users are forced to provide faster transaction rates. Currently, the cost is $ 0.32 per transaction.

All of this is worrying because the most significant advantage of cryptocurrencies is that transactions are resolved in real-time and at a lower cost than traditional ones. Bitcoin lovers (for lack of a better term) dismiss these problems as insignificant, often unable to admit that these problems will only get worse, not better.

One of the solutions is to allow more transactions per block. 11% of bitcoin miners currently support this solution (as they install modified blockchain software). As soon as they become more than half full, there will be a “bitcoin split.” This could mean that one bitcoin will be divided into two different bitcoin currencies: Bitcoin Core (classic bitcoin) and Bitcoin Unlimited (modified bitcoin). However, as Nick Szabo explains, allowing the expansion of blocks puts the security of the agreement at risk.

Longer transaction times

The bitcoin blockchain is too long, even though most transactions were allowed per block. The real problem is that the blockchain is getting more significant as all historical activity is recorded in the blockchain (like blocks). This is one of the fundamental issues of blockchain technology in general.

Ripple, for example, a competitor (or add-on, as some claim), is not based on a “blockchain” but a distributed ledger. For this distributed judge, only the current transaction is recorded and not all historical transactions. This prevents process times from being controlled. As of now, Bitcoin cannot support transaction volume or close to the total volume of global transactions.

Ripple does not prevent nodes (equivalent to bitcoin miners) from maintaining their historical records, for example, to improve customer information. However, Ripple thinks there is no reason to move these records across the entire transaction verification network.

Higher transaction costs

As we approach the limit of bitcoin issuance (the limit is 21 million units, and there are currently 16 million bitcoins being distributed), mining bitcoins are declining. Although the price of bitcoin is likely to rise sharply and/or computer costs fall, we will reach a point where bitcoins in mines are no longer profitable. The result is clear: miners will lose interest and offer less research power to process transactions.

What is the solution?

Either bitcoin users will have to encourage bitcoin miners by offering transaction funds as if it were an auction, or bitcoin should be exchanged again to allow for more offers.

Even with the “split between bitcoin,” transaction costs will come out of control, or the maximum withdrawal threshold should go up (some suggest expanding bitcoin supply by one or two percent per year indefinitely). In any case, buying bitcoin is a risky investment, as it involves speculation of a positive outcome in terms of fundamental changes in the bitcoin protocol. These protocol changes are made almost unanimously. There is a good chance that any decision will turn out to be bad for the future of bitcoin.

The most important limitation of the blockchain

The winners are likely to be those who recognize the limits of blockchain technology and meet these challenges. It seems that initiatives that address these problems are beginning to exist, such as Ripple and Ethereum (blockchain for smart contracts).

Despite being a pioneer, we suspect that bitcoin faces the same fate as Napster: to remain an old memory, taking its revolutionary and pioneering spirit to its own grave. The analogy between bitcoin and Napster might be more accurate than Nick Szabo discerns.

About author


Morris is a Technology enthusiast and a writer by night. He has been a part of TheTechly for quite some time and he contributes knowledgeable news articles from the Technology niche.
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