Raoul Pal, a former Goldman Sachs manager, believes that BTC will be worth $1 million in three years, as outlined in his Global Macro Investor guide. With so many factors now like COVID-19, it doesn’t seem like Bitcoin block size and blocks weight matters. Wrong. Block size and weight control how many transactions can go through and how. In such volatile times economically or otherwise, the maximum block size for Bitcoin blocks matters.
First of all, we need to know a bit about block size history and its hard forks and disagreements. Ready? Keep reading to get the low-down.
Bitcoin Block Size Limits—Why Controversial?
Part of understanding block size limits means knowing a bit of history. When Bitcoin was launched with “Block 0” in January of 2009, the block size was a max of 36 MB, although the actual size of the block sent was only 285 bytes.
In 2010, before Satoshi Nakamoto left the project, he/she/they reduced the block size to 1MB and then enforced it in two separate commits. At this point, blocks were more or less only in the kilobyte range. Some believe Satoshi could see the handwriting on the wall in the years to come. This preeminently prevented transactional spam and denial-of-service (DDoS) attacks on the Bitcoin network.
The first time the average block size made it to 745KB was on July 9, 2015. Until this point, no one noticed Satoshi’s block size limit contribution. Blocks themselves fill with the transactions from people sending and receiving money. Miners try to stuff as many transactions as possible into a block. Difficult-to-complete blocks are adjusted by the Bitcoin Core Clients to keep a block to a 10-minute solution cycle.
One of the arguments favouring larger blocks is that there can be more transactions in each block. This means that more transactions can be completed in 10 minutes and lower transaction costs. However, the flip side of this argument is that with an increase in size, only those with the most powerful machines will be able to maintain Bitcoin clients.
Since Bitcoin’s goal was to be decentralized, this defeats Satoshi Nakamoto’s purpose of keeping control out of an elite’s hands. Worse yet, most miners today pool their resources in Bitcoin pools. This means if no one is running Bitcoin nodes, miners become an authority on the network, and they will be able to make mistakes or even commit fraud. Without any Bitcoin node to verify miner’s proof of work and that the blocks are valid, Bitcoin would become irrelevant to the legacy system, depending on miners’ authority.
Hard Forks On the Horizon
Talks on increasing the blocksize started in June of 2015 with suggestions ranging from keeping 1 MB to high as the original 32 MB. No one could agree on a size that worked for everyone, except that all the major Chinese mining pools were onboard for larger blocks. Another proposal, BIP 101, suggested a max block size that increased predictably—much like the bitcoin reward halves approximately every four years. It was well-received by most and would increase the limits to 8 MB.
The real fun started when Segregated Witness (SegWit) was released in October 2016, with Bitcoin Core 0.13.1. This move changed the game, and the first hard forks of Bitcoin came in 2017 as an opposition to SegWit. Bitcoin Cash, as a result, separated from the main Bitcoin network in August of 2017, and two months later came Bitcoin Gold. Lastly, a little over a year later, came Bitcoin SV because of growing irritation over block size on the Bitcoin Cash network.
Segregated Witness is a different avenue due to its soft fork nature. This allows for retro-compatibility with all the previous Bitcoin Core clients, composing the Bitcoin network. SegWit included scaling improvements to optimize bitcoin block sizes. SegWit splits a transaction on a block into two parts. It takes the signature (Witness) and appends it separately at the end of the block.
The original section continues to hold the receiver and sender data intact. The way the data for the signatures compresses to about one-quarter of its original size. This brings a new dimension of “block weight” into the mix. This means that a 1 MB block can be 4 MB in size. It does this by manipulating the Merkle tree transaction record.
Why It’s Important Block Sizes Remain
Having no size limit (or a substantial limit) is a big problem. There are some reasons for this. The risk of consensus failure, leading to various hard forks, is a significant concern. This came to reality with Bitcoin Cash, Bitcoin SV, and the flailing Bitcoin Gold. Orphan rates would increase with larger block sizes as well. This increases the chance of double-spends and other attacks like the 51% attack and DDoS that we talked about Satoshi stemming in 2010.
Probably more bewildering, increasing the block size doesn’t solve the scaling problem. Not all transactions in the world can happen on the Bitcoin base layer, and you could argue that it has never been the intent.
How Bitcoin Can Scale Using Other Solutions
On-Chain scaling solutions to compress block information even further are protocols like Xthinner. Xthinner touts its ability to compress a block by 99.6%. It’s competing with Compact Blocks protocol, which Xthinner says it can beat by four to six times. Even more, solutions include Graphene. Graphene hopes to be useable on more than just Bitcoin’s proof-of-work blockchain, but any blockchain. It’s essential to have efficient block synchronization and propagation, which can benefit the Bitcoin network to run more efficiently.
This would only emulate the same progression we saw in the early days of the Internet with MP3, which optimized and compressed the medium rather than opening bigger floodgates. Sure, today we have fibre-optic connections in some parts of the world, but that’s still pretty spotty. Even assuming the whole world was using fibre-optic, it’s obvious we all still benefit from media compression that power Netflix, YouTube and Spotify today!
That’s Off the Chain
The Lightning Network is a “layer 2” or second layer system. This provides off-chain functionality without losing the trustless operation that is Bitcoin’s foundation. This is important because no max block size (be it 4MB or four petabytes) would support the whole world’s future transactions on the main blockchain.
It will combine on-chain and off-chain innovations that improve Bitcoin’s scalability and push it past the seven transactions per second bottleneck. This is essential for the future needs of transactions on Bitcoin.
The theoretical capacity of the Lightning Network could even surpass the giants of this world, such as VISA, Mastercard and AMEX, all combined. This is another peer-to-peer layer, which means more disintermediation and more power to the currency holders than the corporations’ power.
Size Matters—Or Does It?
By now, you probably have a good grasp of bitcoin block size—certainly more than most. So does block size matter? The size of blockchain blocks matters for transactions per second. However, there are more ways to skin this blockchain cat than increasing the size arbitrarily—which increases centralization. Changing the block size is also changing the health of the network, increasing the number of orphans blocks, and it would turn into a massive resource waste for miners whose blocks are orphaned.
This would result in only the great powerful nations which could compete in mining. Bitcoin, wanting to be a currency and a fair protocol for all that does not make any geographical distinction and which must operate in a hostile climate, must remain within reach of all. This means it needs to be able to run in Africa with less potent internet. It needs to run on the TOR network in restricted areas of the world. Bitcoin clients need to be able to run on old hardware if it is to give economic opportunity to the most deprived of this world.
At D-Central, we strongly believe in the core ideals of Bitcoin. That is to say, the decentralization of economic power.