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In the early days of Bitcoin, fans of the cryptocurrency saw it as a way to replace the need to use banks, credit cards, or cash in day-to-day transactions. Want to buy your favorite hamburger when you go out? Use Bitcoin. Want to buy some roses for Valentine’s Day? Use Bitcoin. The dream of these early adopters was that Bitcoin’s ability to make quick, secure, pseudonymous transactions would make it a better option for use in everyday transactions. Fast forward twelve years and the narrative behind Bitcoin has completely changed. If you spend any amount of time in the Bitcoin community, you’ll soon hear that Bitcoin’s value proposition has moved from being used in small, frequent transactions to being used as a de facto store of value. There are many reasons behind this paradigm shift for Bitcoin. One that you’ll commonly hear thrown around, especially if you talk to fans of alternative cryptocurrencies like Bitcoin Cash, is block size.
What is Block Size?
Most cryptocurrencies are built on a digital software or ledger (i.e., record book) called a blockchain. The inner workings of blockchains can be rather complex, but we’ll keep the discussion rather simple here. In order for a cryptocurrency transaction to be processed, it must be grouped together with other transactions into a “block”. The block of transactions is then linked together with the other blocks that came before it. This chain of blocks, or blockchain, effectively contains the record of your transaction and every other transaction that ever occurred using that cryptocurrency.
As we all know, financial transactions of any type contain certain information. Almost all transactions will contain information about the amount of money transferred, the date and time it was sent, and the people who sent or received it. If you transfer money on Venmo, the transaction might also contain your Venmo address and a user-generated description of why money was sent. If you use a credit card, the transaction will likely contain your credit card number and the merchant’s information. And if you use a blockchain, it will probably contain a reference to the previous block of transactions to determine block sequence and an identifier of the blockchain (i.e., software) version.
Data takes up space, whether it’s in the Cloud, on a computer, in a blockchain, or anywhere else. In the case of blockchains, where a record of all transactions ever performed is maintained, data takes up A LOT of space. Block size is one of the main ways that cryptocurrencies and their blockchains address the question of how much data to accept at a time. If we were to oversimplify, we could say that allowing larger blocks on the blockchain would generally allow more transactions to be processed at the same time, while allowing smaller blocks on the blockchain would generally allow fewer transactions to be processed at the same time. Since block size is a pretty big factor in determining the number of transactions for which a cryptocurrency can be used, you can imagine that there have been some heated discussions between Bitcoin users who see it as a store of value and Bitcoin users who see it as a replacement in day-to-day transactions.
Block size: Bitcoin vs. Bitcoin Cash
If you subscribe to Bitcoin alone as a cryptocurrency, then cryptocurrency can really be divided into only two groups: Bitcoin and everything else. But because Bitcoin’s software is available to be accessed and changed by anyone in the world, “everything else” has grown to include thousands of other cryptocurrencies. Many of the cryptocurrencies out there are extremely different from Bitcoin and their uses are endless. However, there are several cryptocurrencies that are very similar to Bitcoin, except for a few tweaks. One of the most well-known of these Bitcoin offshoots is Bitcoin Cash.
I’ll save the history of Bitcoin Cash and the specifics of the contentious disagreement among the Bitcoin community that led to its creation for another post. But in a nutshell, proponents of what became Bitcoin Cash were annoyed that Bitcoin allowed so few transactions to be processed in each block of its blockchain. And they believed that Bitcoin’s “small” block size was driving high transaction costs, which made it much less likely that everyday people would use the cryptocurrency for everyday transactions. Their proposed solution was to increase the size of Bitcoin’s blocks from a limit of 1 megabyte to 32 megabytes, which would allow more transactions to be processed at a time. Some Bitcoin users were against the change, while others supported it. Since Bitcoin isn’t controlled by a central party who could make the decision for Bitcoin’s users, many stayed with the original block size and blockchain, while others split off and started using larger blocks on a separate blockchain that came to be known as Bitcoin Cash. Time will tell whether either, or both, groups were right, but both Bitcoin and Bitcoin Cash are still widely used today.
Block Size and Decentralization
As you can imagine, there are a few other reasons why block size matters to a cryptocurrency like Bitcoin. One of the most significant being the cryptocurrency’s ability to maintain its status as “decentralized”, or rather, outside the control of any one group or a relatively small number of groups. That’s another topic that I’ll address in another post. For now, you should know that many people see decentralization as one of the biggest benefits that cryptocurrency can offer because it means that the cryptocurrency can’t be controlled by a government, bank, or company.
So what does block size have to do with decentralization? Well, as we discussed before, blocks contain transactions, which contain information, which takes up space. And space can be expensive. For example, if you want to buy an external hard drive with a terabyte of capacity, it will likely cost you anywhere from $50 to $100.
But wait… didn’t we say that Bitcoin’s block size is currently limited to a single megabyte (i.e., a tiny fraction of a terabyte)? Yes, but remember that a blockchain isn’t limited to the most recent block, but rather every single block that has ever been processed on the blockchain. As of this update (5/29/2021), Bitcoin is currently on block 685,383. So, to oversimplify again, we can imagine that the size of Bitcoin’s blockchain might be around 685,383 megabytes long. And since the blockchain for Bitcoin Cash can handle 32 megabyte blocks, that blockchain could in theory get much larger at a much faster rate.
Anyone can download and run the Bitcoin software. But the larger the blockchain gets, and it's always growing, the harder it might get for average users to continue to contribute to decentralizing the power structure for the cryptocurrency. After all, who has lots of money to buy lots of space for transactions? Governments, banks, and companies. Perhaps you live in a part of the world where $50 to $100 isn’t a huge expense and you could pretty easily buy a terabyte of storage or maybe even a few terabytes. But not everyone lives in your part of the world and not everyone has that kind of money to spend on a computer, let alone on space to run an entire blockchain on it.
The Problem (?) Of Block Size And Decentralization
So perhaps it sounds like every blockchain will eventually be too large to be decentralized. Not so fast. There are a few other considerations and workarounds that have already been thought of and other technologies will certainly be invented that will help address the impact of block size.
For example, did you know that the earliest personal computers only allowed for a tiny amount of space? The original floppy disks (for those of us who don’t know what a floppy disk is, think of it as a prehistoric version of saving data on a USB or in the Cloud) had space for only about 80 kilobytes of data. Personal computers have come a long way in the intervening few decades and today you can get a computer with a few hundred gigabytes or more of available space without breaking the bank. As more time passes, our computers will become more powerful and have more space for data, or in the context of cryptocurrency, more space for larger blockchains.
Certain developments within the cryptocurrency space are also coming about to address the limitations of block size. “SegWit” is an update to the Bitcoin blockchain that removes some of the non-specific transaction data from each block, meaning that each block has more space available for actual transactions.
What is Block Size Good For? A Lot and A Little.
Block size is certainly not a conversation that is going away from cryptocurrency anytime soon. It is, by its very nature, one of the most basic components of cryptocurrencies and blockchains. And fans of one cryptocurrency or another will continue to debate why their blockchain’s block size makes it better suited for one purpose or another well into the future. Just remember that block size is only one part of a cryptocurrency’s value proposition. It’s up to you to determine the reason why any cryptocurrency is valuable to you.
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