The internet has changed significantly since the introduction of Bitcoin, the first crypto in history. Bitcoin’s concept of safe, immutable, and trustless transactions has helped many internet users worldwide have freedom, and the coin’s value has also increased dramatically over the period.

Despite being innovative, Bitcoin was far from ideal. As more users became aware of the Bitcoin network, the number of transaction requests grew rapidly. The slow rate of transaction processing speeds of Bitcoin could not compete with some established payment processors like VISA and MasterCard. In other words, Bitcoin has a scaling issue.

Due to the fact that transaction confirmations could take several minutes or even hours, new Bitcoin users frequently found themselves in long transaction queues. Certainly not what the majority of users were looking for in a user experience.

In this article, we’ll look at Bitcoin’s scaling issues and some solutions.

Introduction to the Bitcoin scaling problem

The Bitcoin scaling issue refers to the inability of the Bitcoin network to execute significant numbers of transactions in a brief amount of time.

Seven Transactions Per Second (TPS) is the average transaction rate for Bitcoin. This is a relatively low transaction throughput because Bitcoin wants to be a global currency and enable cross-border payments like Visa and Mastercard. The two payment platforms report throughputs of about 24,000 and 5,000 transactions per second, respectively.

The Bitcoin network generates a block around every 10 minutes, and the maximum size of a block is 1MB, which presents a scaling challenge. BTC transactions are packed into blocks that miners add to the blockchain when full nodes have verified them. As a result, a large block might include more transactions. Faster transactions can happen as a result of a higher frequency. Although they appear to be rather simple solutions, they have several disadvantages.

Let’s see some of the possible limitations responsible for Bitcoin scaling problems.

Limitations with Bitcoin blockchain

• Block size: Each Bitcoin block has a maximum capacity of 1 megabyte (MB) of data, constraining the amount of information it can hold.  
• Block time: Approximately every 10 minutes, a new Bitcoin block is generated, determining the frequency of transaction confirmations.
• Throughput: Due to the limitations imposed by Bitcoin’s block size and block time, the network can process only about three to seven transactions per second.
• Transaction Cost: The restricted throughput creates a situation where there is high demand for a limited supply of block space, leading to steeply increased fees during periods of network congestion.
• Programmability: Bitcoin’s scripting language has limited functionality, making it challenging to implement complex smart contract logic. Consequently, creating Decentralized Applications (DApps) on Bitcoin is far less simple compared to the ease of doing so on Ethereum.

Apart from the limitations, what exactly is stopping Bitcoin blockchain from being scalable? Let’s find out below.

The Scalability Trilemma

Finding a balance between decentralization, security, and scalability is crucial to solving the scalability issue with Bitcoin; this problem is known as the ‘scalability trilemma.’ According to this trilemma, a blockchain network can only simultaneously optimize two of these three crucial characteristics, necessitating trade-offs in order to increase scalability.

Let’s now focus on some possible scaling solutions that can help the Bitcoin blockchain flourish.

Bitcoin scaling solutions

Ultimately, scaling Bitcoin can be done in one of two ways. Either updating the blockchain or adding layers can scale the network.

The Lightning Network is a layer-2 scaling solution, while SegWit and Taproot are blockchain improvements. Here is a quick summary of these solutions.

#1 Segregated Witness (SegWit)

2017 the Bitcoin Core upgrade known as SegWit, also known as Segregated Witness, was introduced. SegWit enhanced several parts of Bitcoin and made room for further upgrades, like Taproot.

The first and most important fix for transaction malleability was made via SegWit. Additionally, it increased Bitcoin’s block size limit, including more transactions in each block. Last but not least, SegWit added two new script types—methods for transmitting and receiving Bitcoin—and a new encoding technique called Bech32.

Bitcoin, however, came out stronger and more scalable thanks to the SegWit upgrade, demonstrating that its decentralization could resist an attempt at takeover by miners and community leaders.

For detailed information on SegWit, click here.

#2 Taproot Upgrade

The Taproot upgrade has played a pivotal role in scaling the Bitcoin blockchain, offering significant improvements in privacy, efficiency, and flexibility.

By introducing Schnorr signatures, Taproot reduced the space required for signature data in transactions, enabling more transactions to be included in each block. This enhancement directly contributed to increased throughput and faster confirmation times, alleviating congestion during periods of high network activity.

Moreover, Taproot’s Merkle tree structure merged multiple spending conditions into a single one, allowing complex smart contracts to be executed more efficiently. As a result, the upgrade not only enhanced scalability by optimizing resource utilization but also fostered greater privacy through its advanced signature techniques. Taproot brought Bitcoin closer to becoming a more efficient and scalable global financial system with these improvements.

For detailed information on the Taproot upgrade, click here.

#3 The Lightning Network

The Lightning Network is an additional layer added to the blockchain of Bitcoin (BTC) that permits off-chain transactions or exchanges between parties outside the blockchain network. The 2nd layer comprises various payment channels between parties or Bitcoin users. In a two-party transaction technique known as a Lightning Network channel, parties can send or receive payments from one another. By managing transactions outside of the blockchain mainnet (layer one), layer two increases the scalability of blockchain applications while still utilizing the mainnet’s robust decentralized security paradigm.

Scalability is a significant barrier to the widespread adoption of cryptos. However, when scaled properly, a blockchain network can process millions to billions of transactions per second (TPS). In this sense, the Lightning Network allows for novel use cases like quick micropayments that address the age-old question of “can you purchase pizza with crypto?” by reducing processing times and associated costs (energy costs).

For detailed information on the Lightning Network, click here.

Conclusion

While there isn’t a one-size-fits-all solution to the scaling issue with Bitcoin, a number of approaches have been put out to increase the network’s capacity for transaction processing. While maintaining a balance between decentralization, security, and scalability remains difficult, upgrades like SegWit, Taproot, and the Lightning Network present remarkable solutions.

Disclaimer: Cryptocurrency is not a legal tender and is currently unregulated. Kindly ensure that you undertake sufficient risk assessment when trading cryptocurrencies as they are often subject to high price volatility. The information provided in this section doesn't represent any investment advice or WazirX's official position. WazirX reserves the right in its sole discretion to amend or change this blog post at any time and for any reasons without prior notice.