Overview of blockchain and bitcoin (Part 3)


1. Time

Bitcoin blocks size are limited to 1MB. This rule limits number of transactions can be stored in each block. Blocks are added to blockchain every 10 minutes. So this allows only 7 transactions added to bitcoin blockchain every second.

Number of bitcoin transactions per second, compared to Visa

But that’s not the only story about speed. Some transactions, like transfer bitcoin for buying a phone, requires 6 confirmations to be valid. 6 confirmations requirement means that after transaction is added to a block, confirmed, broadcasted to network, there must be at least 6 subsequent blocks added to blockchain after that block. This requirement restricts possibility that an attacker can change transaction after receiving product. The more confirmations, the more secure (hard to alter) transaction is. Now maybe you see the problem. To get that kind of transaction trustworthy confirmed, buyer must wait at least 60 minutes to buy a phone. But that is the happiest case. When bitcoin price is increasing, if transaction fee buyer added to transaction is not attractive enough, miners would not add that transaction into blocks soon. Then waiting days for the first confirmation is usual. Transferring money, then pay high fee or wait for some days? What do you choose? That maybe not convenience enough for any financing system.

There were some tries to increase block size. The most famous one is Bitcoin Cash, which increased block size from 1MB to 8MB. That was a hard fork. But increasing block size also increase delay in block broadcasting. That’s why bitcoin developer team did not agree with the 8MB proposal. Increasing block size can improve transaction handling speed (more transactions stored in blocks), but slow down block broadcasting, leading to multiple branches existing in blockchain at every moment. Then take time to correct, waste many blocks in not-longest chains. Increasing block size is a tradeoff.

Hard fork is is a method for developers to update bitcoin’s software.

Decreasing difficulty of hashing algorithm may increase hashing (in other words: mining, validation, confirmation) speed, but will decrease system’s security.

When bitcoin price is increasing nowadays (20 times from beginning of the year), 1MB every 10 minutes is not enough for storing huge amount of transactions. That’s why bitcoin transfers are taking too much time, and expensive.

2. Cost

For those 7 transactions/second, bitcoin is already estimated to use 35 times as much energy as Visa. If you brought bitcoin’s transaction volume up to Visa’s it would be using as much electricity as the rest of the world put together. Because bitcoin system consumes tremendous compute power, billion dollars of electricity and network bandwidth, storage capacity, it becomes not as cheap as planned. Miners want to make their money payback and profitable, in the form of transaction fee (while rewarding bitcoin is halving every 4 years and only equal to 14 of the first days). So mining investors are always attracted by high-fee transactions.

Let’s look back to the first far days, when transactions only cost a small portion, some percents of a bitcoin. But recently, that “small portion” worth about $20 to $50. Which has not cheap anymore. If I want to transfer a small amount of bitcoin, which worth about $2 to my friend, and do not accept to pay tens of dollars for fee, my transaction would wait for days in prioritized-by-fee queue to be confirmed. My friend has no way to receive that money until that transaction is confirmed, 2 days later.

More people are joining, more transactions are generated. Along with increment of bitcoin price, transaction processing time and cost are increasing too. This makes people harder to do normal financing activities. This is a paradox.

3. Privacy

Bitcoin originally promotes privacy, since it is not possible to know who is behind an address by just reading it. But blockchain system is not transactional private. Values of all transactions and balances are publicly visible. Give anyone an address, he/she can get all transaction in and out of that address from the beginning of time, and that address’s balance. If I transferred bitcoin to a friend, then I know his bitcoin address, so I can see all his transactions, and his balance. Solution for this problem is using one-off addresses. But it is not easy for normal people to use such an annoying method. Because lastly, all your coins should me transferred to some few addresses. It does not make sense if today I have 1000 addresses, next year I will have 5000 ones.

Another privacy leaking is user’s transactions can be linked to reveal user’s information. Your financial status can be linked to your identity. If you want to hide, you should hide your payments and income also. But bitcoin is not transactional private. So you should keep your address private (!), or one-off.

Bitcoin employs peer-to-peer network, on top of the internet. Every communication in bitcoin system goes through the internet, which use IP addresses. And IP addresses are linked to real-world addresses, by Internet Service Provider. Knowing an IP, everybody can easily query for location of that IP. Knowing real-world address to personal identity is not a long way. So bitcoin users need to hide IP. How? Using Virtual Private Network, or Tor. I am thinking about teaching my non-tech girl friend using VPN…

But in this real world, many  people are making transactions with the same address frequently. I know a lot of my friends, who are software engineers, using only 1 or 2 bitcoin addresses for trading online. After sending them some coins, I can query transaction history of their address, and I know how many money they are having. Asking people to use multiple bitcoin address is just like convincing them to change bank account after each activity. That does not make sense at all.

4. Security

Everybody must keep their private key(s) secret, as secure as ATM card PIN. If they lose those keys to bad people, they will lose all things protected by them. People are relying on single-point encryption, the  private keys,  rather than a more sophisticated mechanism that might involve.

If people lost their house’s door key, worthy properties in their house may gone away. But they can get money back by insurance. If people want to transfer a big amount of money to someone, they have to sign in some pieces of paper. If someone steal your money, they can be caught by police. These methods exists to keep people safe. These methods do not exist in bitcoin world. You have to protect yourself, with all risks acknowledged.

Bitcoin private key is hard/impossible to remember. They are just sequence of meaningless characters like: e9873d79c6d87dc0fb6a…Can you remember it? Mini private keys exist, but they do not help much. Not only impossible to remember, but another problem to private key is how to keep them secret, and able to find when needed. There are several ways: online, offline, printed copy… Online: you must trust the online service. Offline: save it in some hard drive, but must keep that computer virus-free and protect its login password. Printed copy: keeping it more secret than your house’s key. Hence, bitcoin keys are harder to keep than physical keys. There are people who printed private key to paper, cut that paper into pieces and kept in multiple bank vaults.

What if you have many one-off addresses (along with many private keys), one for each transaction? How to manage these addresses and private keys, keeping them all secret? This is where wallet software take place. But you have to put all your bitcoins into trust of the software. Not only the software, how about malware, virus, trojan, hardware failure… There were people whose bitcoin accounts drained because their email had been hacked and their password was stolen. They were stunned to have no recourse.

If everybody have to do all above things to protect their anonymity and security, the usability of bitcoin would severely decrease.

5. Usability

Bitcoin is easy for people to use, but very hard for them to be protected. Best practice is a long list. Researchers are working on finding new ways to attack and protect blockchain, while keeping it convenience. In the meantime, people are trading bitcoins, try to keep balance between usability and other benefits.

6. Storage

At the beginning days, bitcoin was expected to only use waste storages, which are very cheap. But recent years while bitcoin price is booming, people are putting their money into bitcoin. Transactions occurs every second. Storage is becoming big and expensive. Moore law has not worked at the same pace like bitcoin’s growth. Not only that, in bitcoin world, all miners must download whole chain, which is now 150GB. And it is growing.

Bitcoin blockchain size until January 2018

With 1MB per block for every 10 minutes, bitcoin blockchain uses 52.5 GB a year. Assume that blocks increase 25% annually, so the chain will be 52.5 * 1.25^10 ~ 3TB after 10 years.

Before 2014, bitcoin blockchain size was only 20MB, which is tiny, nearly free, and can be stored in any personal computer. But nowadays, it is big enough to be carefully considered. Total number of storage bitcoin system using would be million times bigger when more people are joining, and the chain is cloning everywhere in the world.

People can use lightweight node to save disk storage, but that will decrease security of system as a whole and make it more vulnerable to attacks. People are recommended to use full node, with full blockchain downloaded to support decentralized system’s security. So, bitcoin is not cheap any more.

7. Scalability

Combining other problems of bitcoin, we got this big one. Storage is increasing to infinity, people are waiting days for transaction confirmation if they don’t want to put tens of dollars into transaction fee… These roadblocks are slowing down bitcoin on the way to be widely accepted.

There were some proposals. One of which is increasing block size from 1MB to 8MB (as mentioned above). Or periodically removing old transactions, only store balance of non-empty addresses in a distributed database. Sharding hashing process: not all nodes validate all transactions but assign to a subset of nodes. This method will sacrifices security for benefits of scalability. With sharding, bitcoin will be more vulnerable to 51% attack, because now attacker only need to control half of subset instead of whole network.

More proposals are in research and applying to improve bitcoin security and scalability. If you have an idea, please put it at Bitcoin Improvement Proposals. If a proposal is not approved by bitcoin development team, it can be implemented by separate team, which will form a hard fork, then create a new coin “branch”: Bitcoin Cash, Bitcoin Gold, Super Bitcoin… Or that separate team will give birth to a fully new cryptocurrency. There are thousands of them: Cryptocurrency Market Capitalizations.

8. Vulnerability

Bitcoin is vulnerable to news. When good news or bad news occur, especially from government, bitcoin price go up or down very quickly. If a government ban bitcoin usage, it will fall. If blockchain technology is in consideration of governments, it will rise. Bitcoin to USD price is dominated by news, not law of supply and demand. And because bitcoin does not represent any physical or real asset, it only exist in the internet and in human’s mind, so it is vulnerable.

When price decreases, it is tremendous. Let’s see what happened when Mt. Gox exchange went down:

Latest transactions at Mt. Gox

Bitcoin system as a whole is also vulnerable to security attacks. If an attack succeeds, nothing is returned. Everything go to somewhere, but nobody know where it is.

Those limitations must be fixed, if bitcoin want to compete with current financing system, other cryptocurrencies and move to next milestone.

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