Bitcoin Scaling Debate
Case Study
Blockchain Technology and Polycentric Governance
"The Bitcoin Scaling Debate describes a period between 2015 and 2017 during which the Bitcoin community engaged in a polarizing discussion on how best to scale the transaction throughput on the Bitcoin network. During this time, and as the use of the Bitcoin network increased, the size of individual blocks (limited to 1MB) began to significantly saturate the number of transactions the network could process at any given time. In July 2015, several Bitcoin developers submitted the Bitcoin Improvement Proposal (BIP) 101 that advocated for increasing the size of Bitcoin blocks to more than 1MB, thus allowing the network to verify more transactions in each block. This proposal required the implementation of a backward incompatible hard fork, demanding significant off-chain coordination and support across various stakeholder groups involved in Bitcoin’s polycentric governance. Those advocating for bigger blocks, perceived Bitcoin as digital cash, which, in order to compete with other solutions such as Visa and PayPal, would need to make various tradeoffs to enable high levels of scalability, throughput, and speed. Several other Bitcoin developers contested that this proposal would require unacceptable tradeoffs on other core characteristics, such as political decentralization and censorship resistance. Bigger blocks would require more professionalized resources and capacity, thus further excluding regular users from becoming miners or validators. For them, it was paramount to maintain Bitcoin’s capacity as a store of value akin to digital gold, preserving its original design and reducing the need for off-chain coordination. Scaling Bitcoin by increasing the block size in the protocol’s code was not a solution. Instead, they proposed scaling Bitcoin by implementing SegWit (formally proposed in BIP 141) via a soft fork. This technical upgrade could free up space within the 1MB blocks, de facto increasing the number of transactions that could be verified per block without requiring a hard fork to implement the change. The Bitcoin Scaling debate ended with a network split, with the Bitcoin Cash hard-fork on the one hand, which increased the blocksize, and the original Bitcoin blockchain on the other hand, incorporating the SegWit proposal in August 2017.
The case illustrates the challenges that can arise in polycentric blockchain systems when interests within and between different decision-making centers become misaligned. While the issue of scaling Bitcoin triggered the broader debate, it ultimately resulted in a critical discussion on how much power each of the decision-making centers within Bitcoin holds and should hold. The outcome of the Bitcoin Scaling Debate suggests that neither developers, miners, nor users are in sole control of Bitcoin’s overarching polycentric order—at least the part technically enshrined in the Bitcoin protocol. Furthermore, the Bitcoin Cash hard fork presents an interesting case of permissionless exit from one polycentric system to create an alternative network, using forking to resolve interest misalignment (Brekke et al. 2021)."
[(https://docs.google.com/document/d/1RmPoALlyKAKFJECDYYNa43NuzY9cOs9JfiEJiOXjxLE/edit)]