The Price of Decentrality – Blockchain and Scalability

One of the outstanding features of Bitcoin and other crypto currencies is to be a decentralized electronic money system. A payment option that gets by without middlemen, banks and other institutions. But decentralization has its price: scalability.

We express many areas of our everyday world in numbers. The optimal temperature for T-shirt weather, the acceptable price for breakfast rolls and the kilowatt hours of electricity consumption. In order to be able to estimate and classify the whole thing better, we use scales. How do you feel on a scale from 1 to 10? The evaluation seems to be easier with numbers, one can imagine (at least partly) better what is meant.

Mempool – storage space for transactions
A scale is the division of orders of magnitude, usually into numbers. The ability to adjust this order of magnitude is called scalability. This is where Bitcoin and other blockchain-based crypto currencies come into play. The blockchain rows block by block and fills them with information. The Bitcoin blockchain is designed to store all essential information so that no middlemen are needed anymore. (For a better understanding, please refer to our “What about Ledgers” series and the Beginner section).

However, as usage increases, the problems increase. In the case of Bitcoin, the size of the blocks is fixed so that only a limited number of transactions can be integrated into a block. If significantly more transactions are to become part of the block chain, a congestion arises – the mempool. As a result, high transaction costs can be demanded for preferential treatment. Bitcoin therefore has its problems especially in the area of microtransactions.

Expensive coffee
Too technical? Here you can consult the often quoted coffee example. If I want to settle my coffee with a Bitcoin transaction, the transaction must be stored in a block. However, in times of high Bitcoin usage, there are many transactions that need to be stored in a block – and the payment for that coffee is one of them.

Buyers and sellers are now faced with a choice between three evils: letting the customer wait until the transaction is stored in the blockchain would be the first. But that’s out of the question when it comes to coffee to go. To demand a high transaction fee from the customer so that the payment process is stored in the next block in the block chain is also out of the question: The transaction costs would be higher than the coffee itself. Therefore, sellers often resort to the rather unsightly solution of accepting a transaction without confirmation in the hope that it will soon be stored in the blockchain. In principle this has proved to be successful, but firstly the fraudster could exploit it, secondly the mempool is emptied after two weeks. If the own transaction had still not been confirmed after two weeks, the coffee seller would have been cheated of money.

The Bitcoin blockchain therefore has problems adjusting the size – the problem of scaling. The Bitcoin blockchain is by no means the only crypto currency that has to struggle with this and other problems. For example, Ethereum currently has a four-fold increase in the number of unconfirmed transactions. Other networks, which may have fewer unconfirmed transactions, have fewer total transactions to handle than Bitcoin.

Ways to solve the scalability problem
The problem of scalability is therefore the block size – the number of transactions is limited. One way to solve this problem, at least in the short term, is block enlargement. In the past, there have been several attempts by parts of the community to do just that. But since there was no agreement in the community, there was a spin-off, a fork – now called Bitcoin Cash.

Another solution is the implementation of Segregated Witness. This Bitcoin update addresses the scaling problem from several angles. On the one hand, more transactions can be integrated into a block without changing the block size. Segregated Witness also enables the Lightning Network. The transactions no longer take place on the blockchain itself, but are executed via separate micropayment channels.