Why does Bitcoin need to scale and what are the scaling solutions, as well as why there are forks.
Each Bitcoin block has a size of 1 megabyte, which can accommodate around 1000 transaction information.
If you check the Bitcoin blockchain browser, you will find that each block is approximately 1MB, close to the block capacity limit. If there are more and more transfers on the Bitcoin network, many transactions will not be packaged and confirmed in the first block after the transaction occurs, and may have to wait for several blocks or even longer. In the history of Bitcoin, there have been several "dust attacks". The so-called "dust attack" is when someone creates a large number of small transfers, causing a large number of unconfirmed transactions in the network, which prevents normal Bitcoin transfers from being confirmed, delays confirmation time, and affects the normal operation of the network. Therefore, in the "dust attack" incident, some traders had to wait for 2 days or even longer for their transactions to be confirmed. Although "dust attacks" are extreme examples, the normal transaction volume on the Bitcoin network has far exceeded their maximum capacity. The size of each block is 1MB, so expanding the Bitcoin block capacity and breaking through the existing 1MB size limit is called scaling. Scaling has been on the agenda of the Bitcoin community since 2014.
We know that the Bitcoin network is a decentralized network. In this world, there is no centralized institution to operate, and everything relies on the community to negotiate to reach consensus. In the matter of scaling, different teams have different ideas, so the efficiency of progress will be relatively low. At the end of 2015, the Bitcoin Core development team and miners held a roundtable meeting in Hong Kong and reached the "Hong Kong Consensus", but this consensus quickly fell apart. In 2017, in New York, the Bitcoin community renegotiated and adopted the SegWit + 2MB scaling method, once again reaching a consensus, which was supported by 83% of the global hash power and signed by 56 well-known blockchain startups from 21 countries. Therefore, starting from the first half of 2017, the Bitcoin system began to upgrade and deploy.
There are many scaling solutions for Bitcoin, and it has gone through many iterations in history.
In general, there are two ways.
One is to use the Lightning Network to settle Bitcoin without touching the Bitcoin block itself, and place a large number of transactions outside the Bitcoin network itself. The other is to directly increase the size of the block. Here, let me explain what the Lightning Network is. Let's say a few friends are playing cards together. They don't settle after every round, but settle after the game is over. For example, A owes B 10 yuan, and B owes C 20 yuan. In the end, A gives C 10 yuan and B gives C 10 yuan. The Lightning Network also records small transactions first and settles them later. This way, the Bitcoin network will not be occupied by a large number of small transactions. However, this technology is not yet mature and the Lightning Network needs to be built on top of the SegWit technology. It has not been widely used yet. Therefore, people have turned their attention back to the expansion of the Bitcoin block size.
Regarding the expansion of the Bitcoin block size itself, it is currently a relatively mature method in terms of technology. Let me introduce you to the three main solutions. They are BIP141, UASF, and SegWit2x. When you hear these three terms, you may be confused, but don't worry, I will explain them to you slowly.
BIP141 is the segregated witness proposal proposed by the Bitcoin Core team. So what is a segregated witness? A segregated witness is designed to allow blocks to carry more transaction volume. We know that the information on the block is divided into transaction information and witness information. Transaction information is the record of transfers on the blockchain, and witness information is the information that each node uses to verify the reliability of transaction information at a certain time. When Satoshi Nakamoto designed Bitcoin, he directly put these two pieces of information into the block, so a block can only carry a limited amount of transaction information. So how to separate this witness information from the block, so that the block only needs to store its transaction information, from this perspective, it can also expand the amount of transaction information that the block can carry.
BIP141 is the currently recognized activation plan for segregated witness. The specific activation condition is: within any difficulty period (about two weeks) before November 15, 2017, if 95% of the hash power sends a ready signal, the segregated witness will be activated. However, this condition is difficult to achieve, so other activation plans have been proposed, such as UASF and SegWit2x, to help implement BIP141 and activate segregated witness.
UASF stands for User Activated Soft Fork. UASF uses software called BIP148 to activate segregated witness. On August 1st, the Bitcoin BIP148 software will reject blocks that do not include the bit1 signal. In other words, if the majority of miners run this software, they will reject blocks mined by a minority of miners who do not run this software. Therefore, these miners will have the longest chain and activate the segregated witness condition of BIP141 on that chain. This plan has been implemented and has given birth to the new blockchain asset we see now, Bitcoin Cash. The block size of Bitcoin Cash can increase to 8MB, which can accommodate about 8 times the number of transactions compared to the original Bitcoin chain.
SegWit2x is the New York Agreement signed by some Bitcoin companies and more than 80% of the hash power at the Consensus conference. The agreement uses BIP91 to activate segregated witness. The practice of BIP91 is: if 80% of the hash power sends a signal supporting BIP91 for two consecutive days, all BIP91 nodes will reject blocks that do not contain the BIP141 readiness signal. Therefore, these miners will have the longest chain and activate the segregated witness on that chain. After activating the segregated witness, by the end of 2017 or the beginning of 2018, SegWit2x will increase the block size limit from the current 1MB to 2MB through a hard fork, which may also lead to a new fork.
Just now, I mentioned hard forks and soft forks. So what is a hard fork and what is a soft fork?
A hard fork occurs when there is a change in the Bitcoin protocol rules, and if old nodes refuse to accept blocks created by new nodes, the blockchain will split into two independent chains. Miners need to choose one of the two chains to mine.
What is a soft fork? A soft fork occurs when there is a change in the Bitcoin protocol rules, and old nodes are not aware that the rules have changed. They will follow the changed rules and accept blocks created by new nodes. Therefore, a soft fork does not create two new chains, but coexists with the original chain. It is similar to when you upgrade software, you can still open a Word 2013 document with Word 2011.
For ordinary people, if Bitcoin really forks, the biggest risk is "replay attacks".
What is a "replay attack"? This happened during the hard fork process of Ethereum in July 2016. At that time, trading platforms and users were not well-prepared because it was the first time they encountered such a situation, resulting in significant losses. For example, if Bitcoin splits into one or more types of Bitcoin, let's call them Bitcoin 1/Bitcoin 2/Bitcoin 3, etc. Users' accounts will simultaneously hold all these split Bitcoins in corresponding quantities. The addresses and private key generation algorithms on each chain are the same, and the transaction formats are completely identical, which means that a transaction on one chain is likely to be completely valid on another chain. So when you transfer Bitcoin 1, your Bitcoin 2/Bitcoin 3 may also be transferred at the same time. If the receiving address is not yours, you may not be able to retrieve Bitcoin 2/Bitcoin 3.
To prevent replay attacks, it is actually very simple for users. What should you do?
Method 1: Do not transfer Bitcoin before the fork dust settles. After the fork is settled, you can transfer Bitcoin to two different addresses that belong to you separately until the two assets are completely separated, and then proceed with Bitcoin transfers. This method may consume a lot of time and fees.
Method 2: Put your Bitcoin in a reliable wallet or exchange platform. These technically capable platforms will operate spontaneously to help you deal with various problems that may arise during the fork process. If you store your Bitcoin in a wallet that only supports part of the Bitcoin after the fork, you may face the loss of the other part of the Bitcoin that cannot be used.
In summary, in this lesson, we talked about the scaling and forks of Bitcoin. Why does Bitcoin need to scale? Because each block of Bitcoin is designed with a limit of 1MB in size, in order to modify this limitation, the Lightning Network and three Bitcoin scaling solutions have been proposed.
We also explained the knowledge of Bitcoin "forks", which can be divided into hard forks and soft forks:
A hard fork occurs when the Bitcoin protocol rules change, and the changed old nodes refuse to accept blocks created by new nodes, resulting in the blockchain splitting into two independent chains.
A soft fork occurs when the Bitcoin protocol rules change, and the old nodes are not aware that the rules are different. They will continue to execute according to the changed rules and accept blocks created by new nodes. Therefore, a soft fork does not create two new chains, but coexists with the original chain. It is similar to when you upgrade software, you can still open a Word 2013 document with Word 2011.
Furthermore, we mentioned that to prevent the risk of "replay attacks" caused by Bitcoin forks, you can do two things: First, do not transfer Bitcoin before the fork dust settles; Second, put your Bitcoin in a trusted wallet or exchange platform that can help you handle various problems that may arise during the fork process. Please remember these two points.