While Bitcoin offers a noble approach to the creation of a digital currency, the system has fallen victim to its own success. The rise in popularity and value has strained the infrastructure of the network due to its limited processing and transmittal capacity.
The problem lies in the size of each block’s limited data storage capacity of one to 1.5MB of data or three to seven transactions per second. Each block is used to store a small amount of data; the limit on the amount of data was a security measure designed to prevent attacks where hackers can increase the size of the blocks to over one MB, increase the amount of data in each block, and overwhelm the network. However, this causes a ‘traffic jam’ in the network caused by the increasing number of transactions requested.
Although the amount of data (1 MB) stored on each block may seem insignificant, when you have hundreds of thousands or millions of transactions all trying to move through the same chain at the same time, this problem, ironically also overwhelms the network. The scalability problem also increases fees and waiting times as miners are paid more to validate larger transactions first causing the smaller (Decimal) transactions to wait hours, even days to process.
The most obvious solution of increasing the size of the block has been proposed, but alternative solutions are being developed.
Segwit (Segregated Witness or Consensus Layer)
Primarily designed to address the “malleability” problem where information encrypted in plaintext can be modified. I.e., if a hacker can guess the format of an encrypted message, he/she can in turn change the message. However, Segwit also by Bitcoin’s design can increase the size of the data block to 4 MB or as proposed, up to 8 MB. However an improvement Segwit can be, its impact is negligible at best, but at least it allows for other concepts like the Lighting Network.
This is a solution based on the creation of direct channels from one peer to another, thus avoiding the bulk of the Blockchain altogether. Known as “Sidechains or Off Blockchain” this is obviously a matter of controversy among the Bitcoin believers the network is no longer decentralized. The way Lightning works is by opening a Hash Time Locked Contract (HTLC) between two parties. This creates a channel, a temporary credit account that remains open to allow for the exchange of transactions until the last transaction is completed and the channel is closed. This improves transfer speeds vastly in that it eliminates the need for every single transaction to be validated by the entire network. It creates a trust between parties in that payment is guaranteed through the terms of the contract. It also allows for
greater fairness as even the smallest transactions can be executed quickly and at low cost.
Developing by a team of the National University of Singapore through the Zilliqa coin (ZIL), it partitions the data on each block and runs verifications separately in a string (shards) that move parallel to the main chain and then collating into a single strand at the end of the process. Picture a conveyor belt (the Blockchain) overloaded with packages, Sharding re-distributes the amount of packages into additional conveyor belts running parallel on both sides of the main line and then merge at the end of the line. During testing the developing team announced that sharding has executed 2,488 transactions per second and with an extended net of nodes, that number could surpass 15,000 transactions per second (twice the number of Visa transactions).
This is just the beginning as other projects like Credits (CS) taunt to be developing technology with the goal of increasing the number of transactions into the millions per second.
Crytpo currencies do not offer protection from greed and mismanagement. Mt Gox is the prime example of this. Mt Gox was a Japanese exchange that launched in 2010 and only three years later was the leading exchange of crypto currency handling the largest volume of Bitcoins. This position was short lived as troubles began to hit the exchange only a year later. In June 2011, the exchanged was allegedly hacked by someone using the credentials of then CEO Mark Karpeles. The hacker then sold a large number of Bitcoins and the exchange announced the loss of 850,000 Bitcoins (valued at $450 Million).
This created a ripple effect that created instability on its trading processes and created massive trade irregularities with other institutions such as the online commerce/payment Dwolla. It also created investigations by the US Department of Homeland Security into possible money laundering. Finally, on February 28 th , 2014, Mt Gox declared bankruptcy citing millions of dollars in liabilities incurred by losses of large numbers of Bitcoins. Whether by fraud, theft, or mismanagement, the failure of Mt. Gox served to underscore fatal flaws in the Bitcoin system as a sound platform to replace the banking system, and tested the confidence of the consumers.
Today, exchanges continue to be plagued with the threats of hacking, insider trading, and fraud. The Italian exchange Bitgrail suffered a hacking attack on Friday 9 th , 2018 and its owner Francesco Firano attempted to cover its losses by asking the development team of Nano Coin (XRB) to alter the coin’s ledger to regenerate the loss of 17 million coins and make it appear as if no loss had occurred. The team refused for the obvious reason that the nature of the Blockchain as an unchangeable ledger prevents this.