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Bitcoin May Have Bigger Problem Than Scalability

  • Miner Centralization Issue
  • Bitcoin Needs Privacy Before Going Mainstream
  • Privacy and Scalability are Related

Over the past couple of years, scalability (or lack thereof) has been by far the biggest topic of conversation in the Bitcoin community. There have been disagreements over how the system should scale to millions or billions of new users over the long term. A spin-off coin, Bitcoin Cash, broke off onto another network due to the desire of some individuals to see an increase in the block size limit, which effectively limits the number of transactions that can be processed on Bitcoin every ten minutes.

While most of the attention has been on scalability, another key issue — in the form of a general lack of privacy features — has not been discussed nearly as much. Some have made the point that the lack of privacy in Bitcoin could be more problematic than the scaling issues it is facing today, although there is also a symbiotic relationship between these two key attributes of cryptocurrency networks.

Miner Centralization Issue

One of the key selling points of Bitcoin in terms of its use as a payment mechanism is that it’s censorship resistant. This is because there is not one, centralized party that is responsible for processing transactions on the network. Instead, a number of different miners are tasked with the job of including transactions in the blockchain.

The fact that a variety of different entities are able to include Bitcoin transactions in blocks speaks to the fungibility of the system. For example, if the Chinese government were to ban certain types of transactions on the Bitcoin network, miners in other countries would still be able to eventually include those transactions in blocks. This was a point made by Adam Back, who is cited in the original Bitcoin whitepaper and is now the CEO of blockchain technology company Blockstream, during a developer panel at the Baltic Honeybadger Bitcoin Conference late last year.

Of course, the fungibility of bitcoin could still potentially be improved if miners were unable to learn anything about the transactions being broadcasted by nodes on the network. During the 2016 MIT Bitcoin Expo, Blockstream mathematician Andrew Poelstra made the point that miners are effectively “gatekeepers” to what transactions are allowed to go into the blockchain.

Poelstra and others have worked on Confidential Transactions, which is a method of masking the amounts involved in Bitcoin transactions. When combined with CoinJoin, which is a method of obscuring the parties involved in a particular transaction, it becomes much more difficult for miners to potentially censor any transactions on the network because they don’t have much information to go on in terms of the nature of each transaction.

Bitcoin Needs Privacy Before Going Mainstream

Mastering Bitcoin author Andreas Antonopoulos also spoke on the topic of privacy[/URL] at the Baltic Honeybadger Bitcoin Conference late last year, and he made the point that the fight over adding better privacy features to Bitcoin could be more contentious than the years-long scaling debate.

“You think the fight over block size was bad?” Antonopoulos rhetorically asked the audience. “You think a few people trying to disagree with trolls and sock puppets and social media and throwing money around the influence opinion (on both sides) was bad?”

From Antonopoulos’s view, the biggest issue with Bitcoin is not scaling, fraud, or the centralization of mining.

“It’s that we don’t have enough anonymity,” said Antonopoulos. “We don’t have enough privacy, and we better fix that before this gets too popular. Adoption of a platform with insufficient privacy is extremely dangerous. If you’re the only one doing anonymous transactions, you’re not anonymous. What we need is ubiquity of privacy.”

Antonopoulos then added that privacy in Bitcoin should not be optional. Instead, privacy features should be implemented by default in every wallet for all transactions.

Privacy and Scalability are Related

If privacy is viewed as a priority for Bitcoin, then scalability may also follow by default; these two attributes are closely related to each other because putting less information on the blockchain benefits Bitcoin in both areas. This was a point made by applied cryptography consultant and sometimes Bitcoin Core contributor Peter Todd at the same conference from late last year.

Todd was mainly talking about the privacy benefits of layer-two scaling solutions, such as the Lightning Network, during his remarks. The Lightning Network is effectively a way of instantly transacting on the Bitcoin network at a low cost without having to broadcast every single payment to the blockchain.

The relationship between better privacy and improved scalability also exists in terms of traditional on-chain transactions. After all, if miners know less about the transactions broadcasted on the network, then increasing the amount of data that can be included in each new block (and thus increasing the necessary resource requirements to become a miner or operate a full node) may become more tolerable because there would be less power involved in terms of adding new transactions into blocks.

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