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Ask CryptoVantage: Can Bitcoin Scale?

People have been asking for over a decade now – can bitcoin scale?

The very first response to the bitcoin whitepaper claimed that bitcoin couldn’t scale: “We very, very much need such a system, but the way I understand your proposal, it does not seem to scale to the required size.” – Donald A. James, “Cryptography” mailing list, Nov 02 2008.

Satoshi went on to explain why bitcoin would be capable of scaling, and in the 11 years since, developers have been working to continuously scale bitcoin.

Even today, however, there are still scaling challenges ahead. Most people have heard of bitcoin by now, but it still isn’t widely used in commerce. For bitcoin to be used by everyone on Earth, it will first have to overcome some major scaling hurdles.

Can Bitcoin scale up to new heights?

Transaction Throughput

Perhaps the biggest scaling issue for bitcoin is the scalability of transaction throughput. The bitcoin network is currently capable of processing around 5 transactions per second, compared to over 10,000 processed by the Visa network. It will be difficult to get bitcoin to the point where it processes 2,000 times more transactions, but it is possible.

One of the most popular areas for bitcoin developers to focus on is scaling – there is an annual conference dedicated to the topic, aptly named “Scaling Bitcoin”. The future of bitcoin scaling looks promising, as there are a number of advanced scaling technologies currently in development. Many of these technologies will have compounding effects, i.e. if we implement two separate technologies that each improve transaction throughput by 10 times, then we effectively increase throughput by 100 times.

It is important to note that the transaction throughput limit on bitcoin refers to “on-chain” transactions – i.e. transactions that are permanently recorded to the bitcoin blockchain. Most of the scaling improvements will come from “off-chain” solutions, where hundreds or thousands of transactions are combined into a single on-chain transaction. A promising off-chain scaling solution is the Bitcoin Lightning Network, which allows for an unlimited number of transactions to take place in an off-chain “payment channel”, which later gets written to the bitcoin blockchain as a single transaction.

Social Scalability

In addition to the technical scaling challenges that bitcoin faces, it must also overcome the issue of social scalability. Nick Szabo popularized the concept of social scalability in bitcoin with his 2017 blog post “Money, blockchains and social scalability”. Simply put, the idea refers to the ability for bitcoin to be used by many people, and for those people to overcome any reasons they might have against using bitcoin.

There is still some stigma surrounding bitcoin. It is referred to by some as only being good for drug dealers and terrorist financing. For some, it will be hard to see past these short-sighted opinions and to understand the true nature of bitcoin. On top of that, it will take enormous efforts to make everyone care enough to use bitcoin.

Switching the global financial system over to bitcoin will involve huge switching costs. It’s not impossible, but it will be difficult to get everyone on board. Bitcoin certainly won’t be adopted as a new world reserve asset overnight.

Regulatory Resistance

Even if bitcoin solves the technical and social challenges, the final challenge will be governments around the world trying to ban bitcoin. The government’s control, in large part, comes from their monopoly and control over the monetary system. They will not let bitcoin replace USD as the world’s reserve currency without a fight.

Already, government’s have tried banning bitcoin. The governments and the powerful bankers are often the ones who describe bitcoin as “terrorist money”, because they are the ones with the most to lose from bitcoin succeeding as a global money.

The government will try to shut down bitcoin. Luckily for the rest of us: They can’t.