Bitcoin scaling explained for newbies

Hi guys,

Wanted to share with you newbies about the contentious topic of Bitcoin scaling. I have jotted down the issue in a Q n A form for easy understanding. Hope you find it knowledgeable.

1. Does Bitcoin have a scaling issue?

   The user base of Bitcoin has seen drastic growth. From being a project with just a few dozen tech enthusiast as its followers, it has managed to have
   a user base that exceeds more than 10 million. With wider user adoption accompanies the problem of the number of
   transactions going up and resulting in the need to process hundreds of thousands transactions on a daily basis. Bitcoin has not had major changes
   done and essentially operates like it did during in its inception and is unable to process transaction fast enough.

2. Why cant Bitcoin process transactions efficiently?

   This is because the block size limit of 1 Mb in the Bitcoin network.

   For anyone who does not know how Bitcoin works, all transactions that take place in the network are recorded in a public and immutable ledger
   named as blockchain. The Blockchain is sequence of blocks, each of these blocks are a cryptographically sealed set of transactions that have occurred
   in the network during the last ten minutes. Each block is permanently added to the end of the blockchain enabling a user to verify all transactions
   accurately.

   The current block size enables 3-7 transactions per second and with the growing rate of Bitcoin it is a problem which keeps compounding each day.

3. How does the block size limit impact the Bitcoin network?

   A small block size limits the number of transactions that could be processed within a second and this could result in the system being clogged up on a
   day when there a high number of transactions. This can result in transactions not being processed for hours or even days. Additionally the speed at
   which transactions are processed also depends on the amount of transaction fees set by the senders and this results in a market of transaction fees
   and users have to set a higher transaction fees to get their transactions processed faster.

   Of recent times transaction times and fees of Bitcoin have seen dramatic increases and this is a existential threat to cryptocurrencies.

4. Has there been any solutions to the Scaling problem?

   The scaling issue has been scrutinized by the Bitcoin community for years, in 2015 two Bitcoin improvement proposals were introduced namely BIP
   100 and BIP 101. Both these proposals aimed to increase the block size limit, the first proposed to adjust the limit by what seemed fit by the miners
   and the latter proposed a one time increase of upto 8 Mb. Both proposals did not come through and of recently there are two different solutions
   namely Bitcoin unlimited and Segwit.

5. How will Bitcoin Unlimited and Segwit address the Bitcoin scaling issue?

   Bitcoin unlimited was introduced as a direct result of previous failed attempts at resolving the block size limits by completely abolishing it and allowing
   miners to create blocks of arbitrary sizes and broadcast them across the network, competing with each other for a place on the Blockchain.

   Segwit was initially introduced to fix a unrelated problem known as transaction malleability, where anyone could do small modifications which changed
   the transaction ID ( and subsequent hash) but not the content. This does not create a problem for the Bitcoin network but it prevented the
   development of more complex features such as second-layer protocols and smart contracts. Transaction malleability was fixed by removing
   transaction signatures and storing it outside the base transaction block, this results in the transaction weighing much less and more transactions
   fitting into one block and allowing transactions to be processed with greater throughput and without having to change the block size. Activating Segwit
   avoids the need for a hardfork.

6. Why Bitcoin Unlimited has not been implemented yet?

   Strong opposition for this proposal is mainly because it would result in Bitcoin being more centralized. Removing block size would result in a
   Blockchain bloat. Currently with a transaction level of 3-7 per second the blockchain is over 100 giga bytes and assuming Bitcoin goes into mass
   adoption the blockchain would very easily grow to several petabytes ( 1 Petabytes = 1000 Terabytes). Therefore only big companies would be able to
   afford the finances required for storage space, powerful computers and adequate bandwidth to process such huge amounts of data and as a result
   wiping off small scale node operators.

7. Bitcoin has Segwit activated, so is the scaling issue of bitcoin been solved?

   Segwit increases the block capacity resulting a higher number of transaction being processed per second.However depending on how fast Bitcoin is
   being adopted the limit might be reached in coming years/decades resulting in a need to increase capacity once again and therefore this has been
   addressed by some as being a temporary fix. Resistance to Segwit resulted in the hardfork of Bitcoin cash which chose to implement a larger block size
   as opposed to changing the transaction structure.

8. Moving forward?

   Increasing number of wallet providers have added Segwit support including major players such as Ledger, Trezor, Kraken, Electrum and coinbase the
   largest wallet provider in terms of transactions. The adoption increases the percentage of transactions that use Segwit and as a result bitcoin fees
   would see a reduction. In addition, the development of lightning and similar second layer protocols that would enhance the scope and potential of
   Bitcoin. These developments could be considered as a part of a important step in shaping Bitcoin to be the widely adopted currency in the world.