What Does Increasing the Block Size Limit of Bitcoin Mean?

Bitcoin is an amazing decentralized currency that has gained tremendous popularity in recent years. With that popularity has come increased use of Bitcoin. There is now building pressure to change the nature of Bitcoin to scale for increasing use. The easiest way to scale Bitcoin is to increase its block size, but many have put forth arguments against doing so because of how this will change the mechanics of Bitcoin.

What is Block Size?

Blocks are the fundamental unit of Bitcoin. A block represents a certain amount of data in the network. The information is processed in blocks, and completing a block is the basis for rewards in Bitcoin mining. The current block size is set at 1MB. The argument is that this is no longer a sufficient amount of information and has created a slowdown in the network. There are many more 1MB blocks being produced in transactions than are being processed and confirmed by miners. By increasing the block size, more information is contained in each block, allowing for more information to be processed more efficiently.

The Relationship Between Block Size and Mining

Mining is what keeps the Bitcoin system running, and any changes that impact mining will change the very nature of how Bitcoin functions. Changing block size has the potential to create a massive impact on mining.

Currently, Bitcoin is very appealing because of its small and decentralized nature. Individuals and small groups of people willing to invest in the time and hardware can become profitable Bitcoin miners. They keep the system running and they produce more Bitcoins. Since this process is split among a very large number of individuals, there is no large central organization or group in control. This is primarily what separates the nature of Bitcoin from basically all other forms of currency that are controlled and regulated by large, centralized organizations such as governments and big banks.

Mining Bitcoins takes more computer power than the average person has. The 1MB limit strikes a very fine balance in this regard. It is high enough that miners must make an above average investment in order to get started, but it’s not so high as to be out of reach of dedicated individuals or small groups. If the block size were to increase or begin to scale with use, then the amount of data miners would have to contend with could become very large.

The Consequences of Block Size Increase

Bitcoin mining is only profitable for those who are the first to process a block. This means speed and computing power is essential to the process. A miner who is consistently behind because of slow hardware simply won’t be able to remain in business. Increasing the block size effectively eliminates small groups of miners because they won’t be able to afford the data center grade hardware required to process the larger blocks. Larger block sizes greatly reward large groups and conglomerates of miners and drive the smaller groups of miners out of business.

It becomes easy to see the end result of this process. Bitcoin would effectively become exactly what it was created to avoid. Large conglomerates of miners operating massive data centers would become the centralized controlling powers in the system, and Bitcoin would be transformed into just another take on the centralized currency systems already in existence.

Scalability Solution

The problem that is creating this pressure on Bitcoin is, however, very real and must be dealt with. Bitcoin is now at a crossroads where it must change somehow or accept being an inferior currency.

One solution is to change how the Bitcoin network functions. Currently, the network is global. All blocks everywhere are readily available and confirmed by nodes of miners everywhere. When Bitcoin was small, this global scale was perfectly reasonable and allowed Bitcoin to reach the widest possible audience. Now that Bitcoin is large and well known, the global scale of the network is overburdened and simply less feasible or necessary.

The network change solution proposed by some groups would allow smaller scale Bitcoin nodes to be isolated from the global network. This is a lot like legal jurisdictions in the United States. There is the Federal Government that handles large scale issues and laws for the entire country. Then there are smaller legal “nodes” in states, counties, cities and so forth that handle smaller laws only applicable to the local group.

The Bitcoin network change would function in largely the same way. A localized Bitcoin node would handle the small transactions within that local node. Larger transactions would still be scaled up to the global network. This would remove a tremendous amount of data from the global network and ease the burden. The best part is that this can all be done without increasing the block size because the system of information handling has been scaled instead of the blocks. Small groups of miners would still be able to operate within their local node and within the larger global network.

While the Bitcoin block size argument is not likely to resolved soon, it will represent a critical change for Bitcoin. The very nature and meaning of Bitcoin is wrapped up inside this conflict, and it cannot be ignored.