Why Bitcoin [BTC] will not break the Internet with its bandwidth needs

OPINION: A Swiss bank has said that Bitcoin could break the Internet with its bandwidth and power needs. As a part of its annual economic report, the Bank for International Settlement detailed why Bitcoin has a “range of shortcomings”.

The report stated that cryptocurrency is too unstable to be used in place of mainstream financial services. The other complaints are that it cannot be scaled up to the level of mainstream, centralized payment processors, as the size and electricity consumptions would be too much. The report said:

“The associated communication volumes could bring the internet to a halt, as millions of users exchanged files on the order of magnitude of a terabyte.”

It is worth noting that the paper spoke about the size of the ledger on which the cryptocurrencies ran. Satoshi Nakamoto, however, already proposed a solution for this problem with chapter 7 of the original whitepaper. The solution was:

“Once the latest transaction in a coin is buried under enough blocks, the spent transactions before it can be discarded to save disk space. To facilitate this without breaking the block’s hash, transactions are hashed in a Merkle Tree, with only the root included in the block’s hash. Old blocks can then be compacted by stubbing off branches of the tree. The interior hashes do not need to be stored.”

This would dramatically decrease the storage costs for the blockchain. Moreover, transactions on the blockchain would not “bring the Internet to a halt” due to the sheer size of the ledger.

For perspective, a single Bitcoin transaction comes up to approximately 250 bytes. Even at the theoretical maximum of current payment systems such as Visa, which is around 54,000 transactions per second, transactions would be about 14336000 bytes, or 14.3 megabytes per second. In contrast, the Internet processes 58194 gigabytes of traffic every second. Even at Visa’s limit, Bitcoin transactions would constitute about 0.000024% of the Internet’s total traffic.

The paper by the BIS also mentions that scalability is an issue. This issue is already being worked on through the implementation of second-level solutions such as the Lightning Network. The number of Lightning Network nodes is more than the number of nodes on the Bitcoin Cash blockchain, proving that the Bitcoin blockchain is on its way to being more scalable.

The paper says that decentralization is more of a weakness than a strength on the Bitcoin blockchain, stating:

“The main inefficiencies arise from the extreme degree of decentralisation: creating the required trust in such a setting wastes huge amounts of computing power, decentralised storage of a transaction ledger is inefficient and the decentralised consensus is vulnerable.”

While reaching consensus on Proof of Work-type blockchains consumes a lot of electricity and processing power, novel algorithms such as Proof of Stake aim to circumvent this problem. By allowing peers to reach consensus through staking, electricity consumption and processing power needs are reduced, allowing for greater application on larger scales.

The report comes at a crucial time where regulators and institutional investors are playing the cat-and-mouse game trying to tackle the negative news which is hampering the widespread adoption of cryptocurrencies. The paper also spoke about the benefits of Distributed Ledger Technology in the financial market, but ultimately decided that the concept is not ready for mainstream acceptance yet.

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