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August 4, 2016 by Leyi Xu

If you have used CoinHako the past few days, you may have realized
that we posted a notice about the congestion on the Bitcoin network.

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If you have made a transaction in Bitcoin, you would realize that it has
taken longer and longer to send your bitcoins to your recipient.

In the past, your transaction might have been accepted in a block within
10 minutes, and your recipient can spend the bitcoins after a pre-deter
mined number of confirmations set by his/her wallet.

If you have tried to make transactions recently, you may realize that it
can take up to a few hours before your transaction is accepted.

This post explains what the block size limit is and how it affects you.

What is Block Size?

In Bitcoin, there is an upper limit on the size of a block. Each block

contains past transactions, and other data. Bitcoin has a block size limit
is set to be 1MB, to prevent spamming on the network. This can ac
commodate around 2000 transactions.

However, due to Bitcoins growing popularity, there has been a growth

in the number of transactions made on the Bitcoin blockchain. The
quota of transactions on the blockchain has been rapidly filling up, and
this means that there is are more unconfirmed transactions piling up in
the mempool. This results in longer transaction time for users.

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Bitcoins blocks are quickly getting filled up.

Without a solution to blockchain congestion problem, transactions on

the blockchain will continue to be delayed.

To quicken transfer, users can pay miners higher transaction fees to be

included in a block sooner. However, this has created bidding war for
transaction fees.

Neither of this is good for Bitcoins users.

This has been identified to be an imminent problem since 2015, and

most agree that there needs to be some way to increase the number of
transactions on the network. However, there is no consensus on how
this increase should be achieved.

What is the controversy?

It is obvious that there should be methods to increase the capacity for

transactions, but how to implement this solution is not obvious.

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There mainly 3 ways: Hard fork, off-blockchain transactions (such as

Lightning) and SegWit.

Since 2015, there has been the debate about what the best way to scale
is. So far, it has only led to a stalemate over the best way to implement
it.

Who are the players in this?

The Bitcoin miners keep the record of all the transactions, and they are
the ones who are discussing and trying to agree upon the best way to
implement a larger block. They are ultimately the ones who decide
which implementation to adopt.

The Bitcoin Core developers are the ones who maintain the Bitcoin
nodes run by a majority of miners.

Bitcoin Classic is another team of developers, which most notably in

cludes former Bitcoin Core developer and early Bitcoin adopter Gavin
Andresen, and Mike Hearn, who famously declared that Bitcoin was a
failed experiment.

There are also other developers trying to come up with alternative solu
tions to the problem.

Why cant we just increase the block size?

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Increasing the block size requires coordination of various bitcoin min

ers, as this is a change that requires a hard fork. This means that the
miners must agree on the solution and act in unison, or it is likely that
there will be 2 separate forks.

However, due to the recent Ethereum hard fork, which saw Ethereum
splitting into 2 chains, both of which are mined and maintained to vary
ing degrees, there are fears that ideological differences in Bitcoin could
end up similarly disastrously. This is why miners are approaching solu
tions that requires a hard fork more carefully now.

There is also controversy about what the best implementation of the

block is. There are many variations about how to implement an in
crease in block size, with differing upper limits and how the upper limit
can change depending on the miners.

What are the other solutions to this problem?

Segregated Witness (Segwit)

Segwit is a soft fork solution developed by Bitcoin Core, originally to

prevent 3rd parties from altering transactions. This solution moves some
data that was originally put into the block into another location outside
the block, which is also transmitted along with the block data. This fea
ture allows it to bypass the block size limit and frees up space in the
block for more transactions. This is able to accommodate 60% to 100%
more transactions per block, making the effective block size 1.6MB to
2.0MB.

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SegWit has been integrated into Bitcoin Cores code repository, and we
can expect to see it released officially soon.

However, SegWit is not a permanent solution to the problem, and it is

possible that the higher limit will be reached, given the growing de
mand on the platform.

Lightning Network

Lightning Network is an off-blockchain solution which allows for a

larger number of transactions at once.

It uses the Bitcoin blockchain only for settlement of the transactions

which takes place during the 10 minutes. Instead of sending bitcoins di
rectly through the network, many transactions can take place through
channels off the Bitcoin blockchain, and only consolidated and final
ized at the next block. This increases the possible number of transac
tions and may help to mitigate the congestion problem.

However, implementing this does not mean it will be sufficient to over

come scaling limitations. Hubs are required to channel funds, and as
a network grows, an increase in block size may still be required eventu
ally.

Why arent other cryptocurrencies facing this problem?

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First of all, Bitcoin is the most popular cryptocurrency. This means that
it is the easiest to obtain and use. Which is why it was the first to face
problems with a block size limit.

Secondly, some of the newer cryptocurrencies have larger or dynamic

limits, whereas for Bitcoin, the 1MB is a hard limit. For example, Lite
coin, which also has a block limit of 1 MB, produces blocks at an aver
age rate of 2.5 minutes. This makes the effective limit over 10 minutes
to be 4 MB. Ethereum has a dynamic block gas limit, which allows it to
accommodate more transactions.

What are the effects?

On 31 July to 1 Aug 2016, there has been yet another meeting between
miners about the block size debate. Speculation about the event has re
sulted in a drop in bitcoin prices. We saw a further drop in prices due to
the BitFinex hack on 2 Aug 2016.

The markets have been following progress of the bitcoin block size de
bate, and it seems that meetings between miners and developers have
resulted in price fluctuations.

Block size limit is an important issue for Bitcoin, because high transac
tion fees, and long transaction settlement time damages the advantages
and capabilities Bitcoin is supposed to offer. However, on the other
hand, increasing block size may mean more centralized Bitcoin mining,
and may come with new problems.

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How this issue will resolve itself, only time can tell. You can look for
the most active discussions on this topic on reddit: r/bitcoin and r/btc

Leyi Xu
Leyi is an intern at CoinHako for Summer 2016. She is passionate about
FinTech and thinks that blockchain is pretty cool.

Economics of Bitcoin Mining Evolution of Bitcoin Mining

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Go Bit or Go Home

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