There are a lot of discussions going on around adoption, scalability, centralisation, and security. In this guide, we’ll take a look at how scaling will impact security, decentralisation, and privacy in the Bitcoin network.
Some proponents of alternative systems based on consensus algorithms like Proof-of-Stake (PoS), Delegated Byzantine Fault Tolerance (dBFT), or Proof-of-Authority (PoA) argue the best solution to developing a scalable currency is to forego the connection to a decentralised, energy-intensive algorithm like Proof-of-Work (PoW) in order to increase scalability.
Other enthusiasts believe there are simple solutions like raising the block size indefinitely, as this would allow for an exponential additional number of transactions to be added to each block, therefore augmenting the blockchain capacity.
There are of course issues with both of these apparently simple solutions. In the words of Richard Heart:
Every problem in life has a simple, and incorrect solution.
— Richard Heart. I Raised $27M for medical research! (@RichardHeartWin) August 3, 2019
Bitcoin network capacity vs bandwidth
To participate in the Bitcoin network without a trusted third party, all of the blockchain data must be downloaded and verified each time a block is produced. The more data that needs to be downloaded and verified to keep pace with the network, the larger the system requirements (bandwidth, CPU, and storage).
How do you think this will impact, let’s say, security? Will it be easier or harder to attack the network? Looking at Bitcoin Cash – a clear example of a Bitcoin fork where the block size was scaled up to 30MB – there seems to be minimal impact in terms of short-range attacks, spam attacks, or denial-of-service attacks. Still, looking at the mining pools, there is a centralisation issue. This means that 51% attacks, like transactions being blocked or double-spent, could be possible.
In terms of decentralisation, we clearly see it becomes increasingly harder to deal with an ever-increasing blockchain. The more storage, CPU, and bandwidth needed, the less people can participate in mining. At least, that seems to be what’s happening with Bitcoin Cash.
Long-term vs short-term security
Increasing the throughput normally comes with increased centralisation – either by having fewer nodes or by requiring current nodes to process more transactions per block, meaning less blocks are needed and less blocks are produced. Or, if the same number of blocks are produced, many will simply be empty.
Security-wise, this can be a long-term problem. With fewer miners, it’s easier for malicious actors to commit unwanted changes to the protocol – something that can bring trouble given the nature of Bitcoin (decentralised, permissionless, and peer-to-peer).
In my opinion, and my opinion only, I see this problem as a double-edged sword. During the entirety of Bitcoin’s existence, how many times have transaction fees been so high you would transact in another crypto instead? Plus, people may choose to pay higher fees for higher security, so that can also be a good thing.
Transactions that do not require as much security could be done in a similar, yet faster network (Litecoin or Stellar, for example).
Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.