As the largest cryptocurrency by market capitalization, the effectiveness of Bitcoin (BTC) as a medium of exchange is still controversial. Unlike fiat money, the supply of which is inherently infinite and which must be managed by a central bank, Bitcoin is similar to gold in that it is commodity money with a limited supply of 21 million.
However, the upper supply limit is not the biggest stumbling block for BTC as a medium of exchange, but rather the transaction throughput. While Satoshi Nakamoto introduced Bitcoin as a peer-to-peer e-cash system that can enable online payments without a central counterparty, an average of seven transactions per second is hardly the standard for scalability.
In fact, scalability is just one of three main metrics required for a currency system to be successful alongside acceptance and liquidity as a medium of exchange. There is an argument in favor of the growing global acceptance of Bitcoin in multiple layers of the global economy.
Price volatility, with Bitcoin peaking at $ 58,000 in the first two months of 2021 and then briefly falling below the $ 30,000 mark, likely indicates ongoing liquidity issues. It is important to note, however, that the current period has been marked by bullish progress that began in October 2020. Ultimately, some analysts expect Bitcoin’s volatility to weaken as more institutions take positions in the market.
What do the critics say?
Bitcoin’s scalability problem is even older than the network itself. When James A. Donald first proposed the system back in 2008, he responded to Satoshi Nakamoto by saying, “As I understand your proposal, it does not seem to be of the required size scale. “
This astute observation has been at the center of some of the more controversial and controversial debates within the Bitcoin ecosystem. Disagreements about how to solve the problem have even resulted in several hard forks.
In these days when Bitcoin critics can’t definitively deny BTC’s value proposition, scalability seems like a low hanging fruit to make an anti-Bitcoin soundbite with. During the Daily Journal’s 2021 annual general meeting, Charlie Munger, vice chairman of Berkshire Hathaway noted that bitcoin would never become a global medium of exchange due to its price volatility.
The 97-year-old billionaire is no stranger to advocating anti-Bitcoin sentiments. Along with Warren Buffett, the two heads of Berkshire Hathaway were responsible for some of the more colorful negative comments under Bitcoin. From “Rat Poison Squared” to “Trading Shit”, Munger once beat up BTC investors for celebrating the life and work of Judas Iscariot.
Munger, like Buffett, belongs to a class of Bitcoin critics on Wall Street who have often claimed that Bitcoin has no intrinsic value. With the price of BTC continuing its unstoppable upward trend over the past decade while attracting considerable institutional interest, critics seem to have only the argument of scalability left.
Even among popular crypto users, Bitcoin’s inability to scale at the basic protocol level appears to be a significant problem. Speaking at the Future of Money conference in February, Mastercard Vice-Chair Ann Cairns stated that BTC was not suitable for its crypto payment plans.
Cairns: “Bitcoin doesn’t behave like a payment instrument […] It’s too volatile and the transaction is taking too long. “As previously reported by Cointelegraph, Mastercard recently announced plans to offer support for cryptocurrency payments on its network.
The number of Lightning Network nodes is slowly increasing
Together with the block creation time of 10 minutes, the block size of one megabyte acts as an actual transaction throughput limit for the Bitcoin network. The 2017 block size debate that ultimately led to the Bitcoin Cash fork proved that Bitcoin purists are failing to adhere to the 1MB block size ethos.
With the “big blockers” now firmly on their own Bitcoin forks like BCH and Bitcoin SV, the question of how BTC can be scaled without changing anything at the protocol level still remains open. From Bitcoin banks to sidechain protocols to deferred settlement infrastructure layers like the Lightning Network, several development projects are currently underway to make Bitcoin more suitable for microtransactions like paying for coffee.
At a high level, these scaling solutions include creating trusted, centralized (sorry the oxymoron) entities or layer two networks that manage lightweight versions of the BTC ledger to manage the actual “coin transfers” without managing the full bitcoin ledger to have to . These sidechain implementations then transmit the transaction data for final settlement in the actual Bitcoin network.
LN is one of the key Bitcoin scaling solutions currently being developed by several organizations including Blockstream and Elizabeth Stark’s Lightning Labs. The Lightning Network is possibly the most popular deferral and reconciliation scaling implementation that allows users to create payment channels that enable instant coin transfers with minimal fees.
According to the LN data aggregator 1ML, there are over 17,300 public Lightning Network nodes and more than 38,400 channels. LN capacity is currently north of 1,100 BTC.
While the LN rollout hasn’t made any significant progress yet, the second-tier implementation with Zap, a Visa-backed startup for payments on the Lightning Network, could get a boost. In February, the company launched Strike – a payment and transfer app that uses the Lightning network for payments.
Strike has also partnered with crypto exchange platform Bittrex to deliver LN-based payments to over 200 countries around the world. The company plans to issue Strike Visa cards to users in the US, Europe and the UK before the end of the year.
What about statechains?
There is a school of thought that argues that the scalability of Bitcoin is only possible through layer two solutions. Ruben Somsen, Bitcoin developer, crypto podcaster and founder of the Seoul Bitcoin Meetup, is one of the proponents of this argument.
Somsen is a proponent of Statechains, another implementation of the second level, but with a certain twist: Transaction participants send private keys instead of the actually unspent transaction output or UTXO. The process involves charging a Statechain compatible wallet with the exact amount of BTC required to trade, followed by transferring the private keys from the sender to the recipient.
Since the transfer of private keys via the blockchain is free and immediate, the idea of the statechain seems to have gained in importance in the discussion about the scalability of Bitcoin. However, exposing private keys has significant security implications.
Recently, the Statechain concept has been changed to include a third unit that acts as an intermediary between the parties to the transaction. Somsen explained how this counterparty association works within the Statechain matrix and told Cointelegraph:
“With statechains you can take your coins off the chain (which means cheap transactions) in such a way that you only place a minimum of trust in others. You have to trust an association, but the association doesn’t know they have partial control of your coins, and they can’t refuse peg-outs (back to the bitcoin blockchain). “
The blockchain infrastructure company CommerceBlock is one of the companies actively developing statechains as a viable scalability solution for Bitcoin. The company is credited with introducing the counterparty association or “Statechain entity” to improve the security of the system. In an interview with Cointelegraph, Nicholas Gregory, CEO of CommerceBlock, explained how statechains work:
“At a high level, statechains are simply a way to transfer your private key to another user. To make this easier, you need to work with a statechain entity. However, the user has full control over his money at all times. You can take your Bitcoin into your own care at any time. Therefore, the transfer is instant and private. “
While Statechains is a standalone scalability solution, some proponents agree that the system could be integrated with the Lightning network. If statechains are running at the UTXO level, it is theoretically possible to implement another layer two protocol like the Lightning network over statechains.
Such a hybrid integration could solve the Lightning Network’s limited node capacity problem while ensuring the ability to facilitate multiple microtransactions across statechains. Since the exact transaction amount is loaded into Statechain wallets, it is impossible to split UTXOs, making Statechain unsuitable for microtransactions in its current iteration.
According to Somsen, the statechains can work independently of each other and work together with the Lightning network: “Statechains complement the Lightning network perfectly, as the opening and closing of channels can take place outside the chain. This removes a lot of the friction that exists in the current Lightning Network design. “
For Gregory, the integration of statechains into the Lightning network is one of the future development plans for CommerceBlock: “Statechains are immediately available and do not require a liquidity lock. However, you send the private key so you can’t do small or specific denominations. This is where LN excels. “
With these and other developments, the search for a functional Bitcoin scalability solution is not yet over. While critics like Munger, who were consistently mistaken about BTC, continue to drop soundbites, developers are working hard to solve one of the longest running problems with the usability of Bitcoin.