The bitcoin scalability problem exists because of the practical limits on the maximum number of transactions the bitcoin network can process. It is a consequence of the fact that blocks in the blockchain are limited to one megabyte in size. Bitcoin blocks carry the transactions on the bitcoin network since the last block has been created. In contrast to Visa’s peak of 47,000 transactions per second, the bitcoin network’s theoretical maximum capacity sits between 3.3 to 7 transactions per second.
The one-megabyte limit has created a bottleneck in bitcoin, resulting in increasing transaction fees and delayed processing of transactions that cannot be fit into a block. Various proposals have come forth on how to scale bitcoin, and a contentious debate has resulted. Business Insider in 2017 characterized this debate as an “ideological battle over bitcoin’s future.”
On 21 July 2017 bitcoin miners locked-in a software upgrade referred to as Bitcoin Improvement Proposal (BIP) 91, meaning that the controversial Segregated Witness upgrade activated at block 477,120. SegWit alleviates the scaling problem in two ways:
One can fit roughly 2 times as many SegWit transactions per block because the one-megabyte limit will only apply to their “witness-stripped” versions, which are smaller in size.
SegWit enables the Lightning Network, a second layer to run on top of the base blockchain layer, hypothetically resolving the scaling problem by enabling virtually unlimited numbers of instant, low-fee transactions to occur “off chain”.
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