Does Bitcoin Need a Higher Block Size or Transaction Fee?

Bitcoin is the shining example of how blockchains, a decentralized, trustless ledger system, can be used. But of late, there has been a civil war going on inside the bitcoin community that has spilled over into mainstream media concerning a technical aspect of the cryptocurrency called block size.

Block size is just what it sounds like: the length in bytes of the block that is used in the linked chain that forms the ledger. The question over how long the block should be arose from concerns that the cryptocurrency needs more computational room for transactions — and it needs that fast to avoid exorbitant block computation fees.

Bitcoin Core and Classic

The Bitcoin Core faction, composed of the original code maintainers, advocates the retention of a 1 MB block size — for now. They hold that changing the block size (also known as the hard fork option) would create two different blockchains that would be incompatible with one another.

Since such a massive change has not yet taken place, the Core faction feels it would be problematic in many ways. To get bitcoin to function seamlessly in a hard fork would require everyone in the ecosystem to run new software at roughly the same time, for example.

The Core faction thinks that a soft fork option called Segregated Witness (SW) holds a way to increase 1 MB blockchain capacity. SW affects how certain network variables are counted toward block size. It would make transactions appear smaller to current nodes on the network so that more could be included in a block, even if blocks are still limited to 1 MB by protocol rules.

That hasn’t stopped another faction from calling for a 2 MB block size. A program called Bitcoin Classic takes the Core program and rewrites it to allow for a 2 MB block size.

It has not yet achieved system activation since adoption of this strategy would force the hard fork occurrence.

Transaction Fees

Bitcoin already has a mechanism to deal with shrinking transactional space. The transaction fees associated with processing a block can serve as a way for users to bid in order to be included in a block. The fee may rise or fall depending on the demand for space.

The problem here is that bitcoin clients (wallets) generally have a set transaction fee built into the software that runs them. When the transaction fee is raised in the real world by others, the blocks generated by the wallets may not be included in the validated chain as long as other blocks with larger transactions fees are waiting to be processed.

This can lead to much longer times needed to settle the blocks generated by clients. CoinDesk reported that “users paying the standard wallet fee of 10 satoshis per byte would have to wait between five and 67 blocks for transactions to confirm, a process it [21.co] estimates could take as many as 13 hours.”

Getting agreement in the bitcoin community is like herding cats. Each faction may believe it is correct or following its own economic interest, but the resolution of the capacity problem must occur before bitcoin use is severely impacted by network congestion or high use fees.

Larry Loeb

Principal, PBC Enterprises

Larry Loeb has written for many of the last century's major "dead tree" computer magazines, having been, among other...