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Scaling Bitcoin the Third Way: Do Nothing

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A third way in the block size debate; some members of the Bitcoin communities vote for preserving Bitcoin’s immutability at all costs, instead of hard- or soft-forking to obtain bigger blocks because they consider Bitcoin to be digital gold instead of coffee money. This opinion has its reasons and its merits - but might turn out to be the best friend of banks and altcoins.

How About we Just Leave Bitcoin As it is?

Usually, whenever there is a discusion on Scaling Bitcoin, the topic is presented as a binary choice between two options: Either SegWit - or Unlimited or another block size increase as a hard fork. Either a technical upgrade that comes as a soft fork and gives a capacity increase - or a solution that may be final in regards to the block size, but takes risks like a hard fork.

Few people see that there is a third way. Doing nothing. Do not scale. Do not increase the block size limit. Leave Bitcoin as it is. This way is not just the result of two sides blocking each other, not only a disastrous outcome of the terrible camp building in the Bitcoin community; it is a solution on its own, preferred by some members of the Bitcoin community, accompanied by a vision of Bitcoin’s future.

If nothing happens, neither SegWit nor Unlimited nor any other kind of block size increase - then what? Has Bitcoin stalled? Failed? Surprisingly, this option has several advantages that are not easy to see.

Immutable, Like an Element of Physical Reality

The disadvantages of not increasing the block size limit are evident.

The capacity of 1MB blocks has already reached its limits. Depending on the daily transaction volume the mempool is bubbling, 10,000 to 20,000 transactions in a queue have become the new standard. If users do not react to this new state and just keep doing, the mempool will explode to hundreds of thousands of transactions and confirmation times of days will become routine. If users react to the new state, fees will rise significantly, maybe reaching something like $1 or more for each transaction, driving small transactions of the blockchain.

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Worst, maybe, is that the growth of Bitcoin usage may come to an halt, and the adoption of Bitcoin through companies may stop due to lacking capacity. Bitcoin might stop being a boy with huge potential and become a grown man with limited capabilities. Not increasing the capacity is like intentionally limiting the education of a man.

How can this be good? What advantage can this have?

The most important advantage of not increasing the block size is, according to its supporters, not changing Bitcoin. Bitcoin’s most valuable property, so they say, is its immutability. That it can not be changed. No President of the United States can order Bitcoin to change, no committee of bankers or scientists can, not even the Core developers or Satoshi himself can.

Everybody agrees that Bitcoin should keep transactions and the state of its UTXO-set immutable, so that nobody can steal your money, undo your transactions or change the maximum numbers of Bitcoins. If those values can arbitrarily be changed by the men with power, Bitcoin might be dead.

Some people however extend the concept of immutability to Bitcoin as a whole. Not only the transaction history should be immutable, but the software at all. The hard coded limit of the number of Bitcoins, the mining algorithm, the transaction format - and the block size. Bitcoin should be like gold, they claim - it should have properties as immutable as those of a physical element. Just like you cannot change the weight of gold, you are not able to change the limit of Bitcoin’s block size.

Supporters of Bitcoin’s immutability reject hard forks generally. A hard fork is a backward-incompatible upgrade. It breaks existing software and risks splitting the network in two. A soft fork is more accepted, but still a not desirable change of the protocol.

Seeing Bitcoin as a digital equivalent to gold, moreover, makes the current state of affairs less horrible. It even makes the complains of those who want to change Bitcoin somehow ridiculous. Who cares when transactions need eight to 12 hours or cost $1.50? Compare it with the transfer of gold through the world. Bitcoin will still be amazingly fast and cheap.

Bitcoin, these people say, is not made for buying coffee or for paying songs you listen on the internet. It is made for high-value transactions of high-value individuals aspiring privacy and to be part of a trustless network. Who cares about the high school kid that will no longer be able to gamble with 50 cent transactions on Satoshi Dice? Or about the New York hipster no longer able to pay for his Starbucks coffee in realtime with bitcoin?

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Sure, there is a point in this argument. It is hard to imagine how the blockchain could host every coffee payment in the world, and immutability is what makes Bitcoin so strong. But all this does not kill the fact that the congestion of the blockchain and the capacity limit are still a problem. A real problem.

Keep Layer 1 Immutable and Scale Layer 2 Infinitely

Bitcoin is in its early days. There are risks that the digital gold will not survive the breakdown of the payment systems, as Bitcoin’s value relies on its potential as a means of payments. There are also risks that the congestion of the blockchain will slow down the crypto-revolution or, worse, drive it directly into the mouth of the controlled and permissioned systems of the state-banking-complex.

Bitcoin might be highly immutable. It might be decentralized, it might have the aura of digital gold. But with the current transaction capacity of 1MB blocks (around 250,000 transactions a day) you will never have a monetary revolution. You could roughly allow every one of the 80 million Germans one transaction a year. The current limit and the cult-like appreciation of immutability might turn out as a gift for bankers.

Most of the supporters of the third way have an answer on this. It goes something like this; immutable should just be “Layer 1” - the layer of the Bitcoin Blockchain, secured by the work of the world’s most powerful computer network of all times, the miners. This layer should be immutable on all costs, while layers on top of it can be created and serve as payment systems. The huge vision is to let “Layer 1” as it is, forever, immutable and small enough to be decentralized, but to scale with further layers to a much higher volume as the Bitcoin blockchain could ever handle.

Currently a couple of ideas apply to become the favorite Layer 2. Most popular are Sidechains and the Lightning Network. Sidechains aim to throw Bitcoins on another chain with a higher throughput and maybe better privacy, while the Lightning Network promises to create a network of payment channels able to process thousands of transactions a second. You can imagine the Lightning Network like rewriting a payment receipt instead of doing a bank transfer. 

Not Ready to Use, Fundamental Problems Ahead

Both Sidechains and the Lightning Network have their promises, but also their unsolved problems. If you leave Bitcoin like it currently is, you can’t decentrally peg a “mainchain”-Bitcoin to a sidechain-Bitcoin. You need a consortium to escrow the sidechained Bitcoin. This makes it more or less the same as Ripple.

And even if a decentralized two-way-peg is implemented, Sidechains still face the problem how they are secured (merged mining seems to be a questionable solution) and who should operate nodes for them for what reason and under what conditions.

Lightning seems to be more promising than Sidechains. But its developers are also confronted with several problems. One of them is to find some kind of private routing to prevent Lightning turning out as a privacy disaster mapping IP- and Bitcoin-addresses in a semi-public database.

Other problems of Lightning are more fundamental. The problems that you cannot save Lightning transactions as a cold wallet nor audit them in a trustless way, which could discourage exchanges to adopt it. The requirement to lock funds in a channel if you want to receive Bitcoins might turn off merchants. Furthermore, it is hard to say at the current state of development how powerful Lightning hubs may become and if this leads to a centralization of transactions.

Many problems. If Lightning or Sidechains will ever become a substitute for Bitcoin transactions, chances are not good that they will be part of wallets in the next 12-24 months. And even if, it is not said that the market will prefer it over other, more comfortable options options. Options, that are already here.

The Limit as the Best Friend of Bankers and Altcoins

Centralized off-chain solutions are like PayPal, but with Bitcoin. Coinbase provides this option. If a merchant uses Coinbase to accept Bitcoin, and a customer of Coinbase pays him, or if a customer of Coinbase pays another Customer of Coinbase, than the transaction doesn’t happen on the blockchain, but just on Coinbase’s databases.

Needless to say that this kind of solution was not the idea of Bitcoin. If it is as centralized on trusted third parties as PayPal, but not as widespread - what’s the use of it? Why use Bitcoin at all? Unfortunately these trusted solutions might be the most useful, efficient, secure and comfortable options to use Bitcoin in the age of an ever-growing mempool. The supporters of immutability might turn out as the bank’s best friends.

Currently, the most pleasant solution of the limitation of Bitcoin’s transaction capacity might be ‘Altcoins’. Coins like Litecoin, Ether, Monero or Dogecoin, maybe some token on Ethereum’s blockchain like DigixDAO, can serve as good means of payment, being fast and funny, like Dogecoin, private like Monero, highly-programmable like Ether or stable in value like - hopefully - Digix. Why pay with gold if you have so many other options?

If Bitcoin keeps its position as the digital gold, and this position might be even strengthened by a rigid preservation of immutability, it could be something like an anchor, giving worth to other cryptocurrencies you use to pay. The new digital gold standard.

In fact, this is exactly what Bitcoin already is on the Altcoin markets. As more and more payment providers enable the option to pay with Altcoins, and more and more Wallets like Exodus or Jaxx enable the storage of different coins and their exchange via Shapeshift.io, this option seems to be most realistic at this time - and a scenario with its utopian and anarchist charm.

In the end, the supporters of immutability might not turn out as the best friends of Bitcoin or the bank, but of Altcoins.