Yes you heard right, Luke Dashjr – a bitcoin core developer – has issued a new BIP (Bitcoin Improvement Proposal) earlier today suggesting Bitcoin decreases its blocksize limit to a third of what it currently is. This BIP proposes a hard fork in which case the Bitcoin blocksize limit would be reduced to 300 kilobytes.
The first thought that may come to your head is that this proposal is pure insanity. Why would we want to decrease Bitcoin’s blocksize any further when blocks are already full and users have to wait over 10 hours for their transactions to confirm (unless of course they use a hefty mining fee). However, this proposal focuses on a different issue that is looming for bitcoin users and node operators. The current size of Bitcoin’s blockchain is approaching 100GB, assuming the average person has at least a 1 TB hard drive, in order to run Bitcoin core one would have to dedicate roughly 10% of their hard drive space.
The huge size of the blockchain, and the amount of time it takes to setup a Bitcoin node is a main deterrent for users who are looking to get more involved with the cryptocurrency. When one starts up Bitcoin core for the first time, and sees it will take a week or longer to download the blockchain, Bitcoin seems very unattractive. For example, if you take a look at Bitcoin’s reddit community you will see that they have over 200,000 readers. However, there are only around 5000 nodes currently operating in the Bitcoin ecosystem, using this data we can estimate that less than 2.5% of Bitcoin users run a Bitcoin node, that statistic is quite discomforting. Furthermore, a Bitcoin node requires a substantial amount of bandwidth in order to operate, it is only understandable that many users do not want to sacrifice their internet speeds for the blockchain.
Benefits to Running a Bitcoin Node
There are many benefits to running your own Bitcoin node. Running a node provides your with complete trustlessness, as having your own copy of the ledger that you validated meaning you do not need to trust a third party. Furthermore, by receiving and sending transactions from your own node, nobody has the power to stop your transactions or refuse to relay them, granting you censorship resistance and permissionlessness. Moreover, an individual node creates privacy, if you use a third party site to check the balance of your address, the site can deanonymize you by linking your ip address to the query. A node also provides you with improved performance, as it is much much faster to query a blockchain through the network vs using a third party site. Last but not least, a Bitcoin node improves protection for the bitcoin ecosystem, if you are a Bitcoin investor it is in your best interest to protect that investment, and setting up a Bitcoin node is a step in the right direction.
Why decrease the block size?
This brings us to our next question, why should we decrease the blocksize? The answer is simple, Luke believes that “the current rate of blockchain growth is demonstratively too high for many users.” Meaning, for the average person the bandwidth and storage provided today is not high enough to justify running a node. In other words, when the average Joe first finds out about Bitcoin and downloads the original Bitcoin client, he realizes that it takes way too long to sync the blockchain. After consulting with users on reddit / bitcointalk, everyone points Joe to use a light wallet such as Electrum or Multibit. By doing so, Joe looses the security that Bitcoin provides, thereby compromising the integrity of the network. It is important for new users to be able to seamlessly start using Bitcoin the way it was intended by Satoshi, however, the time it takes to set up a node is a long lasting issue.
That is why Luke Dashjr proposed we scale Bitcoin back a bit in order to let its true potential shine. It’s like the saying goes “one step back, two steps forward”. By reducing Bitcoin’s blocksize to 300 kB, the rate at which the blockchain grows will slow down dramatically. This will allow current technology to catch up to the point where it would take an hour to sync a 100GB blockchain rather than a week. Using the average growth rate of bandwidth the last years, Luke assumed a 17.7% technological growth rate. Using this figure, the new BIP proposal suggests a blocksize growth rate of 4.4% every 97 days – which equates to a 17.7% yearly growth. If this hard fork were to be implemented, we would reach our current 1MB blocksize in the year 2024. By that time, technology would have caught up to seamlessly and quickly allow users to setup the Bitcoin core client, with the full blockchain on their drives.
What makes this proposal so attractive is the fact that it can be tested with no obligation prior to activation. Miner’s could simply limit blocks to 300kB with no strings attached, such a change does not require a hardfork as it is simply setting a further limit to the amount of data that can be packed into a block. This will allow miners to back out of this BIP if they find it causes problems, making this is the first blocksize solution allowing a “testdrive”.
Could this proposal be implemented?
Limiting the blocksize further will create even higher transaction fees for users, making this BIP quite controversial. As if Bitcoin’s fees aren’t high enough already, unless more improvements come along, users will have to pay triple the amount if this proposal is implemented. To add insult to injury, miners have everything to gain by implementing smaller blocks as transaction fees will skyrocket, bringing the miners even more profits.
Bitcoin transaction fees have been on a steady climb since the blocks started filling up in 2016. In fact, the average amount of transaction fees per day was at roughly 40 BTC, as Bitcoin was trading at $380 at the time, that makes roughly $19,000 in fees per day – not a small amount to say the least. Today, the average amount of transaction fees per day is at a staggering 125 BTC. At Bitcoin’s current value, that equates to $114,000. As you can see, transaction fees have gone up tenfold in a single year, how much further do you think the miners can push users before they decide to switch to an alternative cryptocurrency?
You may think, it is only natural for miners to look for ways to make more money, as the halvening significantly hurt their profits, that is where you are wrong! Before November, Bitcoin’s protocol rewarded 25 BTC per found block, however after the halvening the reward dropped to 12.5 BTC. Since a block is found every 10 minutes, that means there are on average 144 blocks per day. At the time, miners were receiving over 3600 Bitcoins per day, that is over $1.1 million. Today, miners receive on average 1800 Bitcoins a day, however, given Bitcoin’s rise in value, that equates to $1.6 million. As you can see miners are making more money now than ever.
Back to the point of could this proposal be implemented, did you know that miners are the only ones that have the power to hard fork our network? What do they have to gain by increasing the blocksize? Sure, that might increase Bitcoin’s adoption rate as it will be cheaper and faster to send transactions, but the miners aren’t betting on that. They are betting on users spending more money on transaction fees as that is their only alternative source of income – other than block rewards. Increasing the blocksize will directly hurt their profits while making their job that much harder, as they would need to allocate more resources and more bandwidth for larger blocks. Furthermore, miners want to avoid hard forks as that may cause instability in the network, and if the fork results in two competing currencies like in the case of Ethereum and Ethereum Classic, that could mean a disaster for big mining farms.
This proposal is different in the sense that if the mining farms decide to implement it, that may mean a direct improvement to their profits. Furthermore, the pressure of even smaller blocks will speed up the introduction of solutions such as SegWit, Lightning Network, and MimbleWimble, which seem to have a much higher chance to be implemented as they do not require hard forks. At the end of the day, it is all up to the miners to decide what BIP they would like to implement, so far they have shut down every BIP that relies on increasing the blocksize, maybe this time they will try it out.
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