IS POOR SCALABILITY
BITCOIN’S NEXT PROBLEM?
By: www.ProfitableInvestingTips.com

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Bitcoin is showing signs of life as it appears to
emerge from crypto winter hibernation. Since
the first of the year the senior cryptocurrency is
up 67%. Along with investors in the Nasdaq
market, Bitcoin investors and traders have the
opinion that the US Federal Reserve is going to
stop raising interest rates so fast and perhaps
stop completely due to a banking crisis.

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Crypto winter showed that Bitcoin and other
cryptocurrencies are subject to the same
economic forces as stocks and other
investments.This could be a long term problem
for Bitcoin when, for years, it was touted as the
alternative investment free from such
influences. Now there is another issue as Bitcoin
returns to economic viability and scalability. Is
poor scalability Bitcoin’s next problem and why?

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Bitcoin Scalability Issues

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Because record blocks in Bitcoin have size and
frequency limits,The Bitcoin scaling problem is
that transactions move more slowly than users
would prefer.The original purpose of Bitcoin was
to facilitate economic transactions on the
internet free of third party control.

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However, real world competitors in this arena like
VISA and MasterCard process transactions in
fractions of seconds while Bitcoin transactions
can take minutes or hours.The issue lies in how
blockchain transactions work in processing
Bitcoin.

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How BitcoinTransactions Work

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Blockchain transactions for Bitcoin processing take
place across a network of computers (nodes).
Transaction processing takes place on mining
nodes while data storage takes place on full
nodes. Each transaction has inputs and outputs
whose number depends on how many parties
are involved in a transaction, where the usual
number is at least two inputs and two outputs.

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Data involved in a transaction includes amounts,
addresses, fees, and keys which identify
transactions. Along the way another group of
nodes validates transactions, reaches
consensus, and then broadcasts the details to
the entire Bitcoin network where they are
recorded into another block in the chain.This is
a very secure system with checks and balances
but it pays a price in lower transaction speed.

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What Slows Down a BitcoinTransaction?

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The speed of Bitcoin transaction processing depends
on solving cryptographic puzzles which in turn
requires computational speed.When the most
powerful, fastest nodes are unavailable, the task
falls to slower ones. As transactions progress, new
blocks must be created and it takes, on average, ten
minutes to create a Bitcoin block. Block size affects
speed as large blocks can accommodate more
information and smaller ones cannot, which slows
things down as well.

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Small blocks of 1 MB versus the original 32 MB size
have a slowing effect on Bitcoin transactions.
The bottom line is that the system allows for
about seven to ten transactions per second
which results in total transaction time being
about an hour and a half for Bitcoin.

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Ethereum Scaling

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We have written about Ethereum maintaining
efficiency by scaling as Ethereum’s reach grows. As
we noted then, Bitcoin, Ethereum, and other tokens
have two choices, upgrade to allow for faster
processing speed or remain a niche token with
limited services and reach.This latter option would
not seem to be a viable way to go for Bitcoin, so
they need to look for solutions before Ethereum
passes Bitcoin in value due to more efficient
processing and a lot more useful services within the
crypto realm.

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Potential Bitcoin Scaling Solutions

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In order for Bitcoin to speed up its programming
needs to change. One solution, called a hard fork, is
to upgrade software to the extent that older version
nodes are not valid in the update.This is essentially
creating a new crypto token which is what
happened with Bitcoin Cash (BCH) which increased
block size to 8MB and then to 32MB. Another hard
fork as BSV or Bitcoin SatoshiVision which upped
block size to 4GB with the goal of competing with
VISA and MasterCard in speed.

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Alternatively, a soft fork is an upgrade that creates
notes that run on an updated protocol while not
requiring older nodes to be upgraded unless a
user wants to use the new features.The best
example of a soft fork for Bitcoin is SegWit or
SegregatedWitness.This approach uses new
data in a separate memory cache which is not
visible from nodes used in the old Bitcoin
system.

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Another approach is similar to what is being done
with Ethereum.The Lightning Network
performs as a parallel channel to the standard
Bitcoin system. Small amounts can be funneled
through “cooperative nodes” that skip some of
the stops in the typical Bitcoin processing chain.
This “two-layer” solution is scalable, faster, and
has the potential to do with lower transaction
fees.

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An Unscaled Bitcoin Is Still a Store ofValue

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The reason for creating Bitcoin was to have a way
to buy and sell things via the internet.Along the
way Bitcoin became an impressive store of
value. At the root of debates about scaling
Bitcoin or not is whether one can simply leave
well enough alone and let Bitcoin remain a store
of value as other tokens take over functions that
require faster and more cost-efficient
processing.

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