By Larry Wright
It goes without saying that the idea of decentralization and blockchain technology would have been moot if it wasn’t for the flagship cryptocurrency, Bitcoin. Bitcoin got launched back in 2009, and at that time, many investors and crypto analysts simply believed that there wasn’t any space for decentralization or the prospect of cryptocurrencies whatsoever. Many went out on a limb to say that Bitcoin, along with the idea of decentralization that it is proposing, will cease to exist in two years or so.
Almost a decade has passed, and not only is Bitcoin still here and thriving, but it has provided a gateway to other various cryptocurrencies and blockchain entities to march on the horizon and change the game of finance for good.
That being said, there are certain limitations associated with the overall infrastructure of Bitcoin; you might be dazzled to know that various cryptocurrencies that came after Bitcoin and are termed as altcoins have actually improved their infrastructure, such as the transactional aptitude, creation of blocks, and other privacy-oriented settings by learning from the drawbacks that the initial model of Bitcoin had.
Despite being a ravishing success, there are still some drawbacks present within the Bitcoin model, and these things need to be addressed right away, or it is going to be just too late.
Some of the most daunting challenges that are being faced by Bitcoin at present include the speed at which transactions get validated, a complete lack and denial of user privacy, and higher fees that tend to rise even higher with the price of the Bitcoin plummeting on the open market and the potential risk of 51% attack.
Biggest Challenges Bitcoin is Facing
The main reason for which these challenges exist is because of the decentralized nature of Bitcoin. No one organization, entity, or Financial Group is responsible for delegating the operations of Bitcoin because it is completely decentralized and sustained by hundreds and thousands of individual nodes, which in union make up the entire infrastructure of Bitcoin. For an action to be carried out or a policy to be executed, all the pertaining parties or nodes within the Bitcoin network must reach a consensus; otherwise, the motion can’t get through.
The sad aspect of this kind of infrastructure is that not everyone agrees on something all the time, which is why there are always pushbacks and deadlines that just slip out of hand and with no apparent ruling carried out for a dedicated motion. There are tons of problems associated with Bitcoin as a cryptocurrency but also as a decentralized entity; to make sure that you comprehend each and everyone in the most subtle way possible following are the problems listed individually for your ease;
Speed
You would be amazed to know that, at present, the whole infrastructure of Bitcoin is only capable of processing seven transactions in total per second, which is extremely slow. It doesn’t even live up to the hype that Bitcoin was the flagship cryptocurrency, the very first thing to have emerged on the horizon as a decentralized entity.
The fiat world, on the other hand, is capable of processing thousands of transactions per minute or hundreds of them each second, so what does this tell you about Bitcoin? That is why there are often multiple delays in the processing of the transactions and their validation into the blockchain network in the form of blocks that live on a decentralized digital Ledger.
If more people are using the network at a given time and the transactional volume is through the roof, the throughput doesn’t even remain at seven transactions per second because it falls steep so rapidly. The creation of a new block on the digital ledger also consumes a lot of throughputs which leads to further delays in the processing times of the transactions, which means that people just continue to pile up with their transactions, and the wait time continues to increase for each of them to be validated.
The developer of Bitcoin originally issued a 10-minute time period for the creation of a new block, and that is extremely debated in the crypto community. Many people think that he did so because he didn’t presume that there would be so much interest in this decentralized technology, so yes, a 10-minute window was perfect for the creation of a new block, while others argue that at the moment, the processing power or throughput might not be enough to cut the time slot which is why the 10-minute hold was imposed by Satoshi Nakamoto.
He also wanted a way to prevent fraud on the network, which also explains the 10-minute window for the creation of each block; one block on Bitcoin Ledger contains about 2000 transactions. Both of these elements have contributed to their own capacity to slow down the entire Bitcoin network, and therefore the validation of transactions has been rescinded pretty intensely.
Privacy
If you are not so well versed within the Bitcoin network or crypto market for that matter, you might have the assumption that Bitcoin, as well as other cryptocurrencies, are completely anonymous, but in reality, they are only pseudo-anonymous. All transactions take place in a public manner, and the record is also public, except a few private things are redacted, such as the name of the sender and receiver, the overall amount transacted, and their IP addresses as well.
But a determined cybercriminal or a person out of curiosity might do some digging on the Internet and backtrace a dedicated transaction all the way to a sender or receiver, thus compromising the integrity of their privacy and personal data. How does this happen? Well, there are web trackers and cookies present on each and every site containing small pieces of code which are programmed in a way to fill in the third parties about your Internet activity, what you have explored in a dedicated Internet session, what are your likings and other such elements.
Once a third party has this information at hand through cookies and web trackers, they can reverse engineer your footsteps to determine what kind of activity you have been dealing with or indulging yourself in on the Bitcoin network.
And then, there is the obvious problem of centralized exchanges, which do require the person who wants to engage with cryptocurrencies to submit their personal information along with identification documents. This always has a bit of a danger hovering over itself, such as if the whole database for that particular exchange gets hacked, so does your personal information, and that is a huge hit on your privacy.
Fees
The first thing that you need to understand about the fee structure on Bitcoin is that it is directly tied to the available space on a block. It has already been established that each and every block could account for 2000 transactions at Max and when that capacity is reached, a new block needs to be formed but in a tethered manner so that it remains attached to the previous one.
Because of this limitation of space, there are only so many miners available on the network; therefore, users who want to validate their transactions must pay a fee as an incentive to those available miners so that they can include their transaction before the others for the sake of validating it in a professional manner.
As the backlog increases where the stumps of transactions are pending to be validated and approved by the miners, but the capacity or number of minors doesn’t increase, then users succumb to paying lofty fees to those miners to attract their attention towards validating their transactions. The whole concept is flawed because as the popularity of Bitcoin is growing, so is the transactional volume, but for some reason, the number of miners available to tackle such throughput is not increasing at all.
Another flaw of this model is that whether you are transacting $5 or a very large amount, the fee to do so would remain the same, which makes Bitcoin not suitable for smaller transactions. This is one of the reasons why Bitcoin has failed to go mainstream while many other cryptocurrencies are now being incorporated into businesses such as education, health care, or even for the purchase of goods and services on the Internet.
Because of this flawed model of transaction fees, you can’t use Bitcoin to buy a coffee or other such items because there is no point in paying intense fees which even surpass the original amount which you would have paid for a cup of coffee.
51% Attack
Another gruesome challenge that Bitcoin as a cryptocurrency has to face is the 51% attack. To better understand the context behind this element, you would have to go through some of the basics of how the entire network of Bitcoin works.
As stated earlier, the whole infrastructure of Bitcoin is completely decentralized, which means that there are people out there who are lending their computational power to the Bitcoin network and acting as miners for the sake of earning rewards and handsome transaction fees for the sake of validating the dedicated transaction.
Each and every miner must reach a consensus for a transaction to be considered validated and its components added to the block on the digital ledger. Should 51% of the computer power that is sustaining the activities of the Bitcoin network choose to unite and launch an attack against the crypto network, the whole thing would fall like a huge piece of domino.
This united organizational group that would commence the 51% attack has the full anatomy of Bitcoin, which means that they would be able to change multiple aspects of the Bitcoin code; they could rewrite the financial history of the entire blockchain if they want to. And if push comes to shove, then they might also engage with double spending because they would have the entire Ledger to themselves; they could just delete some of the transactions and edit the others, making them the sole owner of the entire blockchain and hence the crypto tokens which they could use for their own advantage.
But of course, for this kind of attack to be successful, 51% of the entire mining personnel for Bitcoin need to go rogue, and that is a far-fetched approach but certainly not impossible, which is why it is considered a threat and challenge to Bitcoin as a cryptocurrency and as a decentralized element.
Number of Forks
What is a fork, you might ask? It is a deviation or an extension of a single entity sitting at the top of the financial chain so that multiple groups or subgroups could be developed for that particular element. Bitcoin is the standard when it comes to the Bitcoin network because it is the only cryptocurrency, but there are multiple forks within the Bitcoin networks, such as Bitcoin Cash, Bitcoin Private, and Bitcoin gold, as these work in their own capacity but are all tethered with the original Bitcoin protocol.
There has been a lot of debate within the Bitcoin community about what’s called a Fork; at the end of the day, it is the splitting of a major element into two different branches and sub-branches which attend to different needs and requirements of the blockchain system. This deviation or splitting also renders the original throughput of the Bitcoin network into parts which means that an already lacking throughput is further divided to power these multiple forks, which leads to further delays and chaos when it comes to validating transactions on the network; hence this is also considered as a challenge to the Bitcoin network.
Bitcoin Network’s Development
Despite all these challenges and their intensity, the development team behind Bitcoin has not had a rest at all, and they are actively pursuing these challenges to find plausible solutions in the form of updates and upgrades to the security code as well as the entire infrastructure of Bitcoin.
There have been major updates launched in the past for Bitcoin, and the most prominent one from those in the 2017 Segwit update, which changed the way fees were consumed for the sake of validating transactions and giving a huge bump to the mining capacity of the network as well.
With the help of this update, the number of transactions that could be validated or authenticated at a given moment was increased, which has eventually helped in lowering the transaction fees and providing more subtle services to the end customers as well.
As for the privacy-related issues with Bitcoin, this update did little to nothing to fix that, but there is some good news, and that is the developers are trying their best to acknowledge at first the privacy issues associated with Bitcoin and alleviate them bit by bit in the form of consecutive updates which would be released in the coming years.
What is the Lightning Network?
Lightning network is not a different processing unit or infrastructure that is tethered with Bitcoin if you were thinking about that, but it is an update that the developers are actively pursuing at the moment. This network runs alongside the primary network of Bitcoin and is associated with validating transactions should the throughput fall too low on the primary network for the sake of verifying these transactions.
A lighting network has a special ability as opposed to the primary network, and that is the fact that it does not require the input of miners for the sake of validating transactions at all. Users can make payments between each other in private channels, and they essentially don’t have to back up the details of the transaction conducted on the lightning network if they don’t want to.
On the other hand, if they do wish to make a record of that particular transaction, a request would be sent from the lightning network to the primary Bitcoin network, and when there is enough throughput available to ascertain that particular transaction, it would get validated and eventually recorded in the form of blocks on the primary network.
This is yet in the development stages, and a final model has not been introduced, but there is an eventuality that sooner or later, it is going to be tethered with the primary Bitcoin network, and if this happens, then there will be plenty of resources available which would help in the faster processing of transactions, eliminating all kinds of transaction fees and making Bitcoin network more economical in terms of energy that it consumes for mining activity and validation of transactions.
Conclusion
The consensus nature of Bitcoin makes it more difficult to acknowledge these challenges and to find potential solutions for them because even if a single solution is made available by a particular user, it has to be approved unanimously by all the other miners, or else it would not go through. Blockchain technology sure has solved a lot of problems for the financial world, but given the fact that Bitcoin was the flagship cryptocurrency and the pioneer of this whole thing, it sure seems disheartening that these problems still exist to this date, and only a little is being done to address them.