Why Bitcoin Will Get Scaling Without Segwit or Large Blocks

Feeeeees!!!

If you haven’t heard by now, there are a lot of transactions floating in the mempool that don’t seem to be getting into blocks. The main complaint of the big blockers is how hard it is to use bitcoin when their transactions aren’t confirmed for 12 hours or more. The usual response by small blockers is something like “then you should get miners to signal for Segwit”, which usually devolves into another small blocker vs. big blocker shouting match.

A Modest Improvement

Once fees are high enough and transactions between them frequent enough, Coinbase and Purse will want to form a bilateral agreement. For example, Purse.io can open a business account with Coinbase where they can deposit or withdraw bitcoins. Whenever some bitcoin is being sent out from Coinbase, Coinbase can ask Purse, hey, is this an address you control? If so, Purse can respond with cryptographic proof that it does and instead of putting that transaction on chain, Coinbase can simply credit Purse.io’s account and let Purse.io know so they can credit the customer. No need to transfer on-chain, no need to wait for confirmations, no money spent on fees, and instant credit of bitcoin on Purse for the customer.

The Start of a Network

Now as more companies agree to bilateral agreements, someone will notice that if A has a bilateral relationship with B and B has a bilateral relationship with C, A can send or receive bitcoins to C using B off-chain without a direct bilateral agreement between A and C. B may or may not agree to cooperate, and in order to incentivize B to cooperate, A and C should agree to pay B something lower than the on-chain cost of the transaction.

The Inevitable Consolidation

As the network of bilateral relationships grows, the natural incentives for each new participant will be such that they will want bilateral relationships with parties that are well-connected, that is, they’ll want to have bilateral relationships with companies that have more bilateral relationships with others. In general, companies will want to open as few bilateral relationships as possible (each bilateral relationship has a cost), but will want each bilateral relationship to route to the most nodes as possible.

The Final Step

At some point, the risk of a centralized network will become an issue, perhaps even before the hub-and-spoke network comes to pass. But how can we take out centralization from a network? How can we have a ledger that’s not controlled by a single company? In order to mitigate the risks of a central authority, what the collective of bitcoin services will want is a distributed ledger that can keep track of who has how much and be able to transfer value quickly and not in the control of a single entity. In essence, they will want a multi-lateral agreement providing a permissioned ledger without a central authority.

The Future

What I’ve described is a private blockchain for a commercial bitcoin network. It’s the natural progression of the status quo because it will give both the small blockers and big blockers what they want, though not in the form of changes to bitcoin. Small blockers get to avoid a hard fork. Big blockers get a network that’s much faster and has more transaction capacity. This scenario may not be what each side wants now, but a future where bitcoin is the bottom layer of a larger system seems very likely.

Conclusion

So what does this mean for bitcoin?

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Jimmy Song

Jimmy Song

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Bitcoin Educator, Developer and Entrepreneur. Book: https://amzn.to/2RSlnTb PGP Fingerprint: C1D7 97BE 7D10 5291 228C D70C FAA6 17E3 2679 E455