In Craig Wright’s latest marketing attempt, Bitcoin SV will increase its block size cap from 128MB to 2GB. The upgrade will make BSV less secure, more centralized, and more costly for infrastructure providers to maintain.
Craig Wright—who has been deemed a fraud by a large portion of the crypto community for claiming to be Bitcoin inventor Satoshi Nakamoto—is again, attempting to mislead investors through his latest Bitcoin SV upgrade.
The upgrade would increase the block size cap of Bitcoin SV from 128MB to 2GB, an eight-fold increase, which the project claims will allow BSV to “significantly scale” while providing “robust utility” to users, especially enterprises.
Bitcoin SV positions itself as the “original” Bitcoin, taking advantage of Craig Wright’s unsubstantiated claims of being the real identity behind the pseudonym Satoshi Nakamoto. The project advertises that, through ‘upgrades,’ it will return to the “original” vision of the Bitcoin protocol by February 2020.
Emphatically, those at Wright’s software development company nChain claim that “BSV is Bitcoin.”
These preposterous claims are peddled by Craig Wright’s billionaire-backer, Calvin Ayre, who syndicates them through his media company CoinGeek—a crypto publication used almost entirely for shilling BSV and Ayre’s other corporate ventures. Both Wright and Ayre have been able to profit from the Bitcoin brand name by sowing controversy and confusion around Bitcoin.
In reality, the latest block size ‘upgrade’ appears to be a marketing gimmick meant to prey on those just learning about cryptocurrency, non-technical investors, and get-rich-quick speculators. For reasons that will be made clear, carelessly increasing the block size of Bitcoin impairs its usefulness.
The scaling debate around Bitcoin
Issues around scaling Bitcoin arose almost immediately after its inception. Hal Finney, the first Bitcoin developer after Satoshi himself, wrote this in 2010:
“Bitcoin itself cannot scale to have every single financial transaction in the world be broadcast to everyone and included in the blockchain. There needs to be a secondary level of payment systems which is lighter weight and more efficient. Likewise, the time needed for Bitcoin transactions to finalize will be impractical for medium to large value purchases.”
Bitcoin’s on-chain capacity is bottlenecked by two factors. The speed at which blocks are created and the size of those blocks. The Bitcoin protocol specifies that blocks should be created roughly every 10 minutes and, through upgrades, has a functional size of approximately 2 megabytes. These factors constrain the network to a throughput of roughly 3 to 7 transactions per second.
As a consequence of these constraints, on-chain transactions incur fees. The average fee to send a transaction on the network currently is roughly $3 with a standard confirmation time of anywhere between thirty minutes and two hours depending on the desired level of security. This makes Bitcoin, in its unaltered form, impractical for brick-and-mortar and in-person transactions.
Experts in the community, including some of the earliest Bitcoin developers like Finney, argue that on-chain Bitcoin transactions are not designed for small day-to-day payments. There are also many who disagree, like Roger Ver, who forked Bitcoin in August 2017 to increase the block size from 2 MB to 32 MB—resulting in Bitcoin Cash. The nuances of the value proposition and application of Bitcoin are outside of the scope of this analysis but will be explored in the August edition of CryptoSlate Research.
The different scaling solutions
Increasing the block size is one of a handful of workable solutions that could address Bitcoin’s transaction throughput constraints.
Deferred settlement: Second-layer solutions like the Lightning network allow users to transact with one another while settling transactions on-chain at a later date. Although there are some tradeoffs and technical limitations to the technology in its current iteration, it has the potential to help Bitcoin scale for small payments that need to be confirmed quickly.
Sidechains: By establishing a two-way connection between the crypto assets on a sidechain and the main blockchain (typically Bitcoin) it is possible to augment the capabilities of the main network.
One example of a sidechain includes merge mining coins like Namecoin, which allow miners to mine both BTC and NMC simultaneously, functionally providing Namecoin with the security guarantees of Bitcoin’s mining network. Another sidechain is Rootstock, a smart contract platform with a two-way peg to BTC, providing smart contract functionality to Bitcoin users. Although sidechains hold a lot of potential they are still largely experimental and have yet to see major use.
On-chain scaling: Finally, there’s on-chain scaling, which increases the block size limit on a network, allowing more transactions to fit in a single block. Simplistically increasing the block size limit is not a workable solution to scaling.
Why increasing the block size is problematic for full nodes
Continually increasing the block size cap is unworkable because it’s necessary for the Bitcoin ledger to be decentralized and auditable. Auditing the blockchain requires the full, unabridged ledger, which becomes more costly to store and verify as it becomes larger.
Hinders full nodes: The primary problem is the cost that’s borne by full nodes, computers set up to verify and ensure that all transactions adhere to the consensus rules of Bitcoin when the block size is increased. An example of a consensus rule is that no transaction output can be double-spent, or that each block may only generate 12.5 new BTC.
At a minimum, a full node must download every transaction that has ever taken place, all new transactions, and all block headers. This gets expensive very quickly.
“If you make syncing with the current state of the ledger too expensive, only a privileged few can stay up to date, effectively adding a hierarchy to a system which must be flat to function,” wrote blockchain researcher Nic Carter.
Industrial servers pay about $0.025 per gigabyte of storage. Using crude calculations, if every Bitcoin block used the full 2MB (30-day average is actually 860 KB), then the annual cost increase for storage for each node:
$0.025 per GB * 2/1024 GB * 144 blocks per day * 365 days per year = $2.57
The Bitcoin blockchain is already 226GB, which means the total annual cost of storage to every node operator is $5.65 growing at a maximum rate of $2.57 per year.
Now, those same numbers for Bitcoin SV with 2GB blocks.
$0.025 per GB * 2 GB * 144 blocks per day * 365 days per year = $2,628
Something to keep in mind is that full nodes are not compensated like miners. Instead, running a full node allows an entity to make transactions more securely and trustless because they do not need to depend on a third party. It also provides access to higher quality raw data about the network. Different exchanges and service providers, as well as those merely looking to support the network, tend to run full nodes.
As the calculations above demonstrate, larger blocks make full nodes prohibitively expensive to operate. Consequently, larger locks mean fewer nodes, more centralization, and a cryptocurrency that relies on more trust. And, design and upgrade decisions around Bitcoin are made to minimize trust.
Creates data dump scenarios
Increased block sizes also reduce the cost of transactions and provide rooms for services, like VeriBlock, to dump data on a public blockchain. These dumps externalize storage costs to node operators.
This is already happening on the Bitcoin SV blockchain: one weather app is responsible for 94 percent of the transactions on its blockchain.
Large blocks amplify block propagation issues
Larger blocks amplify the orphan block rate, increase the probability of reorgs, and makes double-spending coins easier. This is because large blocks take longer to propagate through a network, the same way that a large file takes longer to download and send to a friend. Moreover, it also means nodes on the network will need faster internet speeds to remain in sync.
Orphan block: where two miners find a valid block at a similar time which results in one of the two blocks, and its respective transactions, not being included in the main chain.
Reorg: When the client discovers a new, longer sequence of blocks, rendering several blocks and—their respective transactions—invalid. Reorgs are one of the main ways to double-spend coins.
These issues make transactions less reliable and less secure for blockchains that use large blocks to achieve scaling.
Prevents a sustainable fee market from developing
For a proof-of-work blockchain to be sustainable it’s necessary that miners are compensated for securing the network with their computing power. Miners are compensated through two channels, block rewards and fees.
Block rewards subsidize the cost of all transactions at the expense of holders (by increasing the supply). Meanwhile, if a blockchain network is totally fee-based then using the network might be prohibitively expensive, diminishing the value of the network and its respective coin.
This represents a tradeoff between subsidizing transactions or maintaining the scarcity of the underlying cryptocurrency. Bitcoin opted for scarcity, halving the block reward every four years and capping its supply at 21 million. On the other extreme, EOSIO wholly subsidizes transactions through block rewards, diluting the value of EOS tokens over time.
For a model which emphasizes scarcity then the network must either transition to, or already be, fee-based. It is critical that a network collects a sufficient amount in fees as it transitions to maintain the security of the network against 51 percent attacks and other kinds of mining attacks.
No blockchain has successfully implemented a model that entirely relies on fees. At current prices, Bitcoin miners collectively earn $20 million per day in fees and block rewards. Fees are roughly $630,000 of that or 3.15 percent of daily mining revenues. By 2140, 100 percent of Bitcoin mining revenue will be from fees.
By the numbers
Bitcoin SV’s push to increase its block size to 2 GB, and later to have it uncapped, are nonsensical for a few reasons.
First, Bitcoin SV rarely takes advantage of its current 128 MB block size cap, mainly because few entities are transacting on the BSV blockchain.
On average, Bitcoin SV uses less than 350 KB per block. The large difference between average block size and maximum block size result in a scenario where services will periodically dump data on the blockchain, causing the spikes in usage seen on a block size chart. Both Bitcoin Cash and Bitcoin SV suffer from this issue.
Put more simply, if block space is not valuable then it will not be used for valuable applications. A look at transactions relative to fees on the BSV network shows a similar picture.
The average transaction fee on BSV over the last three months was $0.002. With an average 81,200 transactions per day, that generates a total of $162.4 in fees for miners.
If Bitcoin SV wishes to maintain the scarcity in its supply through halvings like Bitcoin, then fees will need to increase substantially. Otherwise, after the next halving Bitcoin SV will experience a downward shock to its network hashrate, making it vulnerable to additional 51 percent attacks.
Block size as a marketing gimmick
With a better understanding of the block size debate, it becomes obvious that Craig Wright and his henchmen are using it as a deceptive marketing tactic. For example, in a statement from nChain CEO Jimmy Nguyen:
“Miners need to be aware that massive scaling is critical for their profitability—especially after the next block reward halving in May 2020… For mining to remain profitable, miners need to earn more in transaction fees from each block to compensate for the lower block reward subsidy. This is only possible on BSV,” said Nguyen.
Nguyen’s comment completely misses the real issue. Bitcoin SV does not generate enough in mining fees because few people want to transact on an insecure blockchain with coins which are of dubious value. By increasing the block size it merely suppresses the cost per transaction, keeping the overall network mining revenues relatively the same while increasing centralization and spam-uses.
The CEO then goes on to cite the May 21, 2019, test block, where for the first time a 1.42 GB block was mined on the network. Allegedly, this resulted in transaction fees that exceeded the 12.5 BSV block reward subsidy.
“This is how Bitcoin’s economic model is meant to work, and this is what Satoshi always envisioned to ensure miners remain profitable,” asserted Nguyen.
However, as shown above, Bitcoin SV uses 332KB per block on average—a pitiful 0.253 percent of its 128MB cap. For context, Bitcoin uses 878KB of its 2MB block space, representing 42.9 percent utilization.
Steve Shadders, nChain’s CTO, explains the next step in BSV’s devolution. In the future Bitcoin SV will conduct its “Genesis” upgrade, where it will completely remove the block size limit, allowing for blocks of infinite size. Allegedly, this would allow for “infinite scaling of the BSV network.
The BSV network will ‘upgrade’ to Quasar and increase the block size from 128 MB to 2 GB on July 24, 2019.
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