Bitcoin is sustainable, but it’s in danger. Increasing transaction costs and volatility are a hot topic in Bitcoin communities, but there is a larger issue at play. The entire community needs to decide on a utility to ensure Bitcoin’s survival.

Why you might ask? Because Bitcoin’s structure should be heavily dependant on its goals and values as an ecosystem. There are now so many players in the game it’s getting very hard to come to a consensus, which is a problem. This article aims to give a simplistic overview of the current landscape.

‘Scaling Bitcoin is simple- just increase the block size’

Most people understand that there are miners out their processing their transactions and mining new Bitcoin but there is still a large amount of people who don’t know what a bitcoin node is. Nodes download the entire blockchain and ensure the rules of the entire network are met. When Bitcoin started the size of the blockchain was small and running a full node was easy from any computer with a reasonable internet connection. People were incentivised to run nodes because they ensure the security and integrity of the network plus keep Bitcoin decentralised- which becomes even more important if you own Bitcoin yourself.

As of January 2018 there were around 11,000 nodes and storing the full Bitcoin blockchain required around 200 gigabytes of free space. Most people don’t have 200GB to give away on their computer- let alone the bandwidth and electricity running a full node consumes. The opponents to SegWit2x, which was based around increasing the size of blocks from 1MB to 2MBs, argued this would cause more centralisation as the size of the blockchain doubles, operating a node becomes even more costly.

If Bitcoin’s goal is to become a global currency and settlement system an extra megabyte to the block size would seem pretty meaningless. To put it in perspective Visa processed 30.5 billion transactions in Q4 2017 or roughly 4000 transactions per second. To scale equivalently Bitcoin’s block size would need to increase to around 2 gigabytes (or double this to account for peak periods) adding hundreds of gigabytes of data to the blockchain each day. How many people would be willing to take on running a node with this much overhead and no real incentive for reward? The answer is: not many. Increased block size also means mining will be restricted to extremely powerful machines which in turn increases mining centralisation even more than it is today.

Ok… but what about the lightning network… it should solve everything, right?

The lightning network enables users to open channels with another party which start with a balance (deposit amount), users can transact as many times as they want back and forth ‘off-chain’ until the channel is closed out. Only the opening and closing a channel count as a transactions on the blockchain therefore you only pay 2 transaction fees for possibly hundreds of transactions.

It sounds good but there are some big problems with the lightning network. Two notable ones are:

Price movements that could occur while your transacting ‘off-chain’. Say you open a channel with a furniture store & deposit 0.5 BTC then spend it all on a new bed. The store closes out the channel at the end of the day with the goal of transferring their earnings to fiat but the price of Bitcoin has dropped 20%. They lose 20% plus the costs of 2 transactions on the blockchain. Not great. Opening a channel could be costly, say $30, depending on current transaction fees. Who would be likely to open a $30 channel with a coffee shop they visit a few times? The lightning network can ‘route’ your payments through other actors on the network you have open channels with, but with current transaction fees it’s going to take a very long time to scale. A proposed solution for this is creating a middle man, commonly known as a ‘hub’. Hubs would open channels with multiple parties and you would only pay to open & close payment channels with the hub. But what incentives are there for one to run a hub? Transaction fees would be the first thing that comes to mind. So with this model you end up with transaction fees and centralisation. Not ideal.

Fair enough, but there is a fixed supply of Bitcoin it will be used as ‘Digital Gold’.

Gold is relatively volatile but nowhere as volatile as Bitcoin. Investors buy gold as a safe haven for their cash, in its current state Bitcoin is failing to prove itself as a viable safe haven.

Many believe that volatility can be solved by one thing: trade volume. While this is true to a certain degree, stability can also come from direction and governance. If the community decided that Bitcoin should not be used a high volume settlement system and rather a store of value, like gold, the market should then decide a price for this utility.

Settlement system, store of value or both?

Bitcoin started out 9 years ago with the goals of being a decentralised currency & settlement system in one, which was deflationary in nature & not affected by governments or central entities.

In 2018 you have an onslaught of main street investors around the world buying and ‘HODLing’ Bitcoin. In its current state this seems pretty crazy. There is no general consensus amongst HODLers as to why they are investing and holding Bitcoin, other than that it will probably be worth a lot of money in the future.

Here are just a few of the many opposing views on Bitcoin’s future.

Bitcoin is fine in its current state and will continue to grow as a store of value for large value transactions. Bitcoin needs to become a global payment network with low fees thus block sizes need to increase, yes this will cause centralisation, but that doesn’t matter. Centralision is bad and goes against the foundations of Bitcoin we need to find ways to scale that does not increase centralisation or risk to the security of the network whether it’s ‘on-chain’ or ‘off-chain’. Off-chain solutions go against the integrity of Bitcoin and we need to develop solutions that do not increase centralisation and stay on the blockchain. None of the current problems matter as technology will catch up to Bitcoin and make everything cheaper and faster anyway. I don’t understand any of this I’m just HODLing 4 eva #gobitcoin.

A gridlock of opposing directions isn’t sustainable.

A decision to make.

There are a some key players in the Bitcoin game which influence the direction the ecosystem takes. Miners, Node operators and Bitcoin’s core developers all have to reach consensus based around what the community wants.

At the end of the day the real power is in the hands of the consumer. If they don’t like something they won’t use it. The challenge for the community is to decide a path which keeps the most people happy and doesn’t threaten the long term sustainability of the world’s first cryptocurrency.

##############################################################

We built the #1 Cryptocurrency dashboard — CoinLoop

Track your portfolio, technical indicator tools, view the most recent and relevant news, full cryptocurrency events calendar and more!

Check out CoinLoop @ CoinLoop.io

##############################################################