As Bitcoin’s user base has grown, so has its struggle with scalability—the capability to handle a larger number of transactions efficiently. 

Read on to learn about the Bitcoin scalability problem, exploring its causes, why it matters, and the solutions, including Bitcoin layer 2 projects that are securing its future as a widely adopted currency.

What Is Bitcoin’s Scalability Problem?

The transaction processing capacity of the base Bitcoin layer is very limited. The network can only process around seven transactions per second (TPS), which is quite low, especially compared to conventional payment systems. This limitation stems from Bitcoin’s architecture, which prioritizes decentralization and security over speed. 

Each Bitcoin block is capped at 1 MB and takes around 10 minutes to mine. While this safeguards decentralization and security and prevents manipulation, it restricts the volume of transactions that can be processed at once. 

As a result, during high-demand periods, the network can get congested, leading to a backlog of unconfirmed transactions and slower processing times. Whenever that happens, fees rise as users outbid each other to have their transactions prioritized by miners. 

Why Scalability Matters

If bitcoin is to become a truly global currency, it must develop a capacity that would handle its widespread use. A higher capacity to process transactions would also allow the network to support more applications beyond a digital currency.

However, increasing bitcoin’s capacity can introduce vulnerabilities or centralization risks. This is what has been referred to as the Bitcoin trilemma. Solving the trilemma would mean achieving scalability, decentralization and security without compromising any, a feat that is challenging due to the inherent technical and structural constraints.

But the trilemma is not the only obstacle that has stood in the way of scaling Bitcoin. 

Its decentralized nature also means changes require widespread community support. Reaching consensus is challenging, as the community includes diverse stakeholders with varying priorities.

Solutions to the Bitcoin Scalability Problem

Several bitcoin scalability solutions have been proposed and implemented, and they can be categorized into layer 1 and layer 2, each with distinct methods and trade-offs.

Layer 1 Solutions

These are solutions designed to change the core of the Bitcoin architecture. The solutions in this category are the hardest to adopt as they can only come into effect if there is a prior consensus within the Bitcoin community.

An example of a layer 1 scalability solution is increasing block size, which would allow more data per block and, therefore, boost the transaction count per second. This approach was attempted in 2017 and failed, resulting in the forking of bitcoin cash from bitcoin. 

Those who opposed it pointed out the fact that a larger block requires more storage and processing power from nodes, which could lead to centralization, as fewer participants could afford to run full nodes.

A Bitcoin layer 1 scalability solution that the Bitcoin community has successfully adopted is Segregated Witness (SegWit). This restructures transaction data to increase block capacity without changing the block size. SegWit separates (or segregates) the signature data from the transaction data, allowing more transactions to fit within a block. 

Implemented in 2017, SegWit has improved Bitcoin’s throughput and helped reduce fees by alleviating some network congestion.

Layer 2 Solutions

Bitcoin layer 2 maintains the core architecture of Bitcoin as they are built on top of the already existing layer. The primary advantage of Bitcoin layer 2 scaling solutions is that they do not require prior community consensus before launching on the network. 

Bitcoin layer 2 projects, such as the Lightning Network, Stacks, Rootstock, BitcoinOS, Build on Bitcoin, and others, have already provided additional pathways to Bitcoin scalability.

For example, instead of recording each transaction on the main blockchain, the Lightning Network creates payment channels between users, allowing multiple transactions to occur off-chain before settling the final state on-chain. This approach is effective for small, frequent transactions.

On its part, Stacks enables smart contracts on Bitcoin. By processing smart contract transactions off the Bitcoin blockchain, Stacks allows for decentralized applications and more advanced financial products without burdening the Bitcoin network. This scalability approach opens up new use cases for Bitcoin, allowing it to go beyond simple transactions.

Statechains are another promising Bitcoin layer 2 solution that enables users to transfer ownership of bitcoin without moving it on-chain. By allowing users to pass ownership keys to one another, Statechains facilitate quick transfers without congesting the Bitcoin network. Though still in the development phase, Statechains have the potential for further scalability, particularly for use cases that require rapid transfers.

Other promising bitcoin layer 2 projects include the Liquid Network and Rootstock, which enable fast, private, and programmable transactions, respectively. There are also Schnorr signatures and Taproot, which enhance privacy and efficiency.

Bottom Line

Bitcoin’s scalability problem is a significant challenge to its adoption as a global currency. With limited transaction throughput, rising fees, and slow processing times, bitcoin has in the past struggled to compete with traditional payment systems. 

However, solutions like increasing block size, SegWit, and Bitcoin layer 2 solutions—such as the Lightning Network, Stacks, and others—have given it paths forward. 

By carefully balancing security, decentralization, and efficiency and reaching community consensus, bitcoin is overcoming its scalability limitations and continues to evolve as a revolutionary financial technology.