Because of the “Impossible Triangle,” decentralization, security, and scalability can only ever be achieved two out of the three in the blockchain industry. Bitcoin, the original cryptocurrency, sets the bar extremely high for decentralization and security, but falls short in terms of scalability. For the Bitcoin network:

Transactions Per Second (TPS) = Number of Transactions Per Block / Block Time

Transactions Per Block = Block Size / Average Transaction Size

Currently, the Bitcoin network has a block size of 1 Mb and block time is about 10 minutes, and if the average transaction size is 0.25 kb, then a block contains about 4000 transactions. So the calculated TPS is about 7meaning that only 7 transactions can be processed per second, which obviously does not meet the demand for fast growth.

In order to solve the scalability problem of Bitcoin, various solutions have been proposed, the basic ones can be divided into two types of Layer 1 and Layer 2 scaling schemes

Layer 1 Scaling Solution: Fork and SegWit

Layer 1 refers to the Bitcoin blockchain itself, while the Layer 1 scaling solution refers to modifying the nature of the blockchain itself so as to increase its TPS. According to the formula, TPS = block size / (block time * average transaction size), increasing block size, reducing block time, and compressing transaction size can improve Bitcoin’s TPS. However, due to the limitations of the speed of data transfer in the physical world, reducing the block time will reduce the security of the system. That’s why increasing block size and compressing transaction size are the two methods mainly considered.

Bitcoin Fork: Increasing Block Size

“Scaling up” is arguably the most obvious way to increase Bitcoin’s TPS.

Historically, the demand for block up has resulted in two major forks in Bitcoin, resulting in two new block chains and tokens, BCH and BCHSV. Forking is essentially duplicating a copy of Bitcoin’s core code and changing parts of it to optimize performance as needed, but there are still pros and cons to this approach that must be weighed.

Bitcoin fork due to community disagreement on future direction

Because Bitcoin is an open source blockchain, it is developed by a community of like-minded people. When members of the Bitcoin community disagree on the future direction of Bitcoin, a fork may occur.

Some community members, for example, may wish to increase Bitcoin’s block size in order to improve scalability and reduce transaction waiting times and costs. Other members may believe that the original block size should be maintained to ensure network security, or they may have different views on the Bitcoin consensus agreement for technical reasons… Such differences of opinion may result in a fork.

BCH was forked in 2017 and BCHSV was forked in 2018 based on BCH

In August 2017, some miners in favor of larger block size pooled their computing power and forked Bitcoin blockchain, creating BCH (Bitcoin Cash) and increasing the block size to 8Mb. In November 2018, under the influence of radical members in the BCH community, BCHSV was forked to support the so-called “mega-block” or even “unlimited block”.

Block size increases node threshold, security cannot be guaranteed after forking

However, there are many problems with simply increasing the block size. As the size of a single block enlarges, the hardware burden on a single node grows significantly, and nodes that cannot afford the associated hardware will gradually drop out of the network. In addition, the block size increases while the speed of data transfer between nodes and the data processing capacity of nodes hardly improves, which will threaten the security and stability of the Bitcoin system. Therefore, the block size expansion solution actually comes at the cost of decentralization and security.

Segregated Witness (SegWit): Separate transaction messages to compress data size

When Bitcoin was first designed, Satoshi Nakamoto limited the size of the block containing transactions to 1Mb, where the transaction data contains both the basic information about the transaction and the signature information of traders. The SegWit technology, on the other hand, increases the number of transactions that can be contained in a block by about 40% by separating the scripted signatures from the transaction information and storing them in the block header, without violating the block audit rules.

Reflected in Bitcoin addresses, those starting with characters such as 3 or bc are Segwit-enabled wallet addresses, while addresses starting with the number 1 are older addresses.

A check on Blockchain.com for recent blocks minted shows that most new blocks come with Segwit technology. Thanks to Segwit, the actual size of these blocks exceeds 1Mb. What’s more, on November 14, 2021, the Bitcoin network also pushed for further Taproot upgrades on top of SegWit, further improving the network’s stability, security and privacy.

Layer2 Scaling: Lightning Network

Layer2 scaling is also known as off-chain scaling, which is a performance solution that scales outside the mainnet to improve the transaction processing speed and efficiency of the Bitcoin network by creating another layer of the network.

Common Layer2 solutions include Side Chain, Plasma, State Channels, Rollup, etc. For Bitcoin, the most prominent Layer 2 solution is the Lightning Network, which was created in 2015.

Lightning Network

The Bitcoin Lightning Network is a decentralized payment system that aims to make bitcoin transactions faster, safer, and more cost-effective. Transactions on the Bitcoin Network can be slow because they must be confirmed by multiple nodes before being recorded on the blockchain.

Lightning Network was created to address these issues.

Integrating payment channels between multiple users and aggregating transaction messages to be posted to the mainnet

Lightning Network essentially establishes payment channels between two users, enabling off-chain transactions (typically small payments), which relieves the mainnet of transaction demand and allows transactions to be processed more quickly. Lightning Network nodes can connect payment channels between multiple users before consolidating all channel information into a single transaction and sending it to the Bitcoin mainnet for permanent recording.

As a result, only the first and last transaction in a payment channel is valid on the Bitcoin blockchain; all other transactions between the two parties are off-chain.

To build the payment channel, both parties must submit a certain amount of bitcoins, which will also be stored in the bitcoin blockchain until the channel is deactivated or closed. The total amount of bitcoins that both parties can trade in this payment channel can not exceed the number of bitcoins submitted, but an unlimited number of transactions can be made without fees.

Concerns About the Lightning Network: Speed still limited by the mainnet, node security, and a high threshold for use

The Lightning Network appears to be a good solution to Bitcoin’s scalability problem at first glance. It has not yet been widely adopted and has the following limitations:

Speed is still limited by the performance of the mainnet: Lightning Network’s transaction speed is still limited by the mainnet’s performance, with a maximum transaction speed of only a few dozen transactions per second.

Concerns about security: Since Lightning Network is decentralized, its security depends on the security of each node. If there is a security breach at one node, the entire Lightning Network may be affected.

Difficulty of using: The Lightning Network is still difficult to use.

Highlights

• Bitcoin is relatively decentralized and secure due to the PoW consensus mechanism; however, its main weakness is the lack of scalability, with an average transaction rate of 7 transactions per second. In order to solve this problem, there are some ideas, such as directly changing the core code of Bitcoin, and improving the lightning network by relying on the mainnet.
• The two Bitcoin forks, BCH and BCHSV, have increased block size and transaction speed, but with increased block size, node hardware requirements will increase, affecting the degree of decentralization, and data complexity will affect security. So the fork is still sacrificing decentralization and security.
• Segwit reduces data size by separating signatures, and most Bitcoin nodes have adopted this technology.
• To speed up transactions, Lightning Network creates inter-account payment channels that consolidate multiple transaction messages before posting them to the main chain. But the development and the security of the mainnet, of the participating nodes, and the high threshold for use continue to limit the speed.