Bitcoin Layers - An Alternative Perspective On Bitcoin Scalability

Proof of Work (PoW) is this mechanism that guarantees the security and immutability of the Bitcoin network.

The Bitcoin blockchain uses a consensus mechanism known as Proof of Work (PoW). Although numerous other digital money protocols were created before Bitcoin (b-money, Hashcash, Ecash, Bit Gold), Bitcoin was the first to solve the double spend problem in a distributed way. The blockchain solves this problem with nodes and distributed computing that validate transactions based on a puzzle of hash functions and nonce fetching.

Network participants compete with computational power (which requires a lot of energy) to solve the puzzle in order to add valid blocks to the blockchain and claim their rewards (fees and newly created Bitcoin). It works like a lottery, the more tickets (electricity, efficient hardware and very fast computer) you have, the better your chances of winning the reward.

Immutability Relies on Expensive Computation

In summary, the computational/energy/working expense of the network is aimed at protecting Bitcoin and preventing malicious agents from cheating the system and modifying the transaction history. In other words, Bitcoin can only be immutable and secure if and only if it is expensive (in value or energy) to defraud the network. The energy cost of PoW is the cost of keeping the network secure in a decentralized way.

When Satoshi Nakamoto created Bitcoin and launched this security system for digital transactions, he also defined that only 7 transactions would be validated every second (a number far below current networks like VISA).

The big thing is that Bitcoin's network limitation is not a network defect, it's a feature. Currently, Bitcoin consumption represents 0.08% of the world's total energy production, but there will never be tens of millions of transactions in the base layer. The Bitcoin block is limited, and a war was fought in 2017 to keep the protocol that way. It is important to remember that the larger the Bitcoin block, the less decentralized the network. The ‘limited’ size of the network is a choice.

Bitcoin Scalability

Now you may be wondering, but if Bitcoin doesn't reach the size of Visa, how can it be the new financial system? Infrastructure of course! Bitcoin allows secure, pseudo-anonymous, intermediary-free and agnostic settlements as to who and the value of transactions take place.

But that doesn't mean you need to pay for your coffee in the Bitcoin base layer. There are thousands of transactions that take place in underlying chains and only use Bitcoin as infrastructure.

The big thing is that Bitcoin scales by layers and not horizontally! The most common tiers are second tier solutions (Lightning), sidechains like Liquid and Rootstock, and smart contract platforms. When users use Lightning for example, one Bitcoin transaction can settle thousands of transactions. In other words, 350,000 transactions per day on Bitcoin's core network does not mean that only 350,000 transactions used Bitcoin security (and energy).

Twitter Adopts Bitcoin

Last week, Twitter innovated and brought Bitcoin payments via Lightning to the platform, expanding the social network's relationship with cryptocurrencies. The Twitter CEO's involvement with cryptocurrencies goes back a long way, as the founder of CashApp, a payments app specializing in cryptocurrencies.

After that announcement, Lighting Network activity increased 20% according to 1ML data. Twitter currently has 353 million monthly active users. If the crypto community takes advantage of this database, the success of Bitcoin scaling up in the form of tiers can be proven.

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George Box