What are the major challenges facing Bitcoin?

Overview 🧬

Bitcoin is the oldest cryptocurrency, having celebrated its 15th anniversary in early 2024. This longevity has enabled the network to gradually decentralise and prove its robustness, having only experienced one rollback (cancellation of a transaction) in August 2010.

The security of the Bitcoin network is its main strength. It is based in part on the simplicity of its operation, limited to fund transfers and a few very restricted functionalities, thus reducing its attack surface.

This security also stems from its minimalist evolution: the network only undergoes rare updates, making limited changes. This "ossification" of the protocol reassures users by preventing the introduction of flaws or imbalances within the network.

Thanks to these characteristics, Bitcoin has gradually gained the trust of a wide population as a store of value.

However, this trust sometimes tends to blind some of its defenders, who predict an inevitable triumph for Bitcoin. It is crucial to bear in mind that Bitcoin is not infallible.

This article therefore offers a non-exhaustive list of the challenges that Bitcoin must - or must not - overcome.

Bitcoin's slowness 🐢

The Bitcoin network favours slowness to ensure that the network's nodes can synchronise and avoid the blockchain's size growing too quickly.

When a transaction is issued on the Bitcoin network, it is first sent to the mempool before being integrated into a block by the miners. A block is created every 10 minutes, resulting in a significant delay before confirmation that a transaction has been included in the next block.

In addition, a transaction is not considered irreversible after a single block, as a parallel version of the network could emerge with a different block arrangement. It is generally estimated that it takes between 4 and 6 blocks, or 40 to 60 minutes, for a transaction to be considered irreversible.

A block can contain around 4,000 transactions, which limits the space available. The network can therefore easily become congested during peaks in activity, pushing users to increase their transaction fees, which can quickly skyrocket.

The high fees and latency of the Bitcoin network are thus holding back the full realisation of its whitepaper, which described it as a "peer-to-peer payment system". Although Bitcoin is used as a means of payment for large amounts, it is now mainly seen as a store of value.

The difficulties in scaling the network 🌐

To address the problems of the main network's slowness and enable the everyday use of bitcoins, several layer 2 solutions (layers 2) have been developed.

The Lightning Network is the main solution enabling fast, low-cost payments.

However, the Lightning Network faces several scaling limitations, including the problem of incoming liquidity, which forces users to deposit funds before receiving payments. Solutions such as Ark are working to address these issues.

In general, the Lightning network has seen relatively limited adoption since its launch in 2018. About 5,000 bitcoins are deposited there, whereas a centralised solution such as WBTC (wrapped bitcoin) holds more than 150,000 bitcoins and allows them to be used on other blockchains.

With regard to Bitcoin's other layer 2s, we analysed them in this article and noted that most were far from inheriting Bitcoin's security properties.

BitVM2 was recently announced, making it more likely that rollups could be implemented on Bitcoin without having to perform a network update.

Even if rollups could be implemented on Bitcoin, they would have more constraints than those on Ethereum. This is because rollups need to post a large amount of data to their layer 1, and the Bitcoin network is not suited to this. This would result in transaction costs that are still quite high on rollups and would also increase their costs on layer 1.

The advantage is that this would allow transactions to be carried out at a more reasonable cost than on the main network while still remunerating miners.

The adoption of synthetic bitcoins on other blockchains ⛓️

The appeal of synthetic bitcoins is twofold: they allow bitcoins to be used on blockchains with transaction costs that are significantly lower than those of the Bitcoin blockchain, and to be used in other applications, particularly in decentralised finance.

Despite their centralised nature, these synthetic bitcoins are enjoying notable success. The WBTC enjoys much wider adoption than the Lightning Network. This popularity might be even greater were it not for the many questions surrounding the players responsible for the WBTC.

BitGo, one of the companies behind the WBTC, recently announced a change to the bitcoin-holding entities covering the WBTC, as well as a partnership with Bit Global, as part of a collaboration with Justin Sun and the Tron blockchain.

This announcement has raised serious concerns about the future integrity of the WBTC. Coinbase took the opportunity to announce the launch of its own synthetic bitcoin: the CBTC. Jesse Pollak, head of Base, then expressed his ambition to create a massive economy around bitcoin on Base (read our survey on the Base-Coinbase relationship).

Coinbase, perceived as a trusted player by a large majority of cryptocurrency holders, could succeed in generating mass adoption of its CBTC within an ecosystem of applications on Base.

Widespread adoption of these synthetic bitcoins presents a twofold risk: not only does it move away from Bitcoin's original ideals, but it could also lead to the majority of bitcoin payments being made on ancillary blockchains, to the detriment of the Bitcoin blockchain. This development would deprive miners of essential revenue.

Future miner remuneration ⛏️

Miners on the Bitcoin network are rewarded for each block they validate by issuing new bitcoins as well as transaction fees paid by users.

Since its inception, miners' income has come overwhelmingly from mining rewards and very little from transaction fees.

With each halving, the number of new bitcoins issued is halved, significantly reducing miners' rewards.

To compensate for this drop in issuance, the value of a bitcoin would have to double every 4 years, which has been the case so far. However, the rise in the price of bitcoin will not be able to offset the fall in emissions indefinitely.

An alternative way of offsetting this fall would be for transaction fees to increase tenfold thanks to constant and sustainable activity. However, it is questionable whether network users would be willing to pay such high fees simply to make transfers.

Without these two sources of revenue, hashrate - the computing power that secures the network - will eventually decline, as miners will no longer be profitable with too high a mining difficulty. At present, the Bitcoin network is largely over-secured, but a continued fall in hashrate would sooner or later leave the network vulnerable to double-spending or censorship attacks.

Measuring hashrate, while useful, remains imperfect. It does not take into account technological improvements by miners and therefore does not necessarily represent the increased cost of an attack on the network.

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A centralising trend? 🤔

The mining business is extremely competitive, driving miners to seek out the cheapest electricity or advantageous terms. In Texas, for example, miners are paid to interrupt their activity when electricity consumption peaks.

These territorial advantages tend to concentrate mining. If a significant portion of the hashrate ends up in a single state, it becomes potentially vulnerable to that state's jurisdiction.

Currently, the US hosts around 40% of the Bitcoin network's mining power. Donald Trump has stated that he wants the US to mine the last remaining Bitcoins. While this is an exaggerated statement, such a policy could be detrimental to Bitcoin's decentralisation.

It is crucial to monitor developments in the global distribution of mining. We need to determine whether low-cost electricity opportunities in areas isolated from power grids can counterbalance centralising trends that favour economies of scale.

We saw earlier that halving increases competition between miners to stay above the profitability threshold. This increased competition drives industry players to merge with each other in order to benefit from economies of scale.

Too much consolidation of mining companies would end up representing major attack vectors on the Bitcoin network.

Finally, mining pools, also represent a threat to the decentralisation of Bitcoin mining. Although it is possible to move from one pool to another, they are in most cases governed by a single operator and its participants do not see the inside of the blocks under construction and have no say in their composition.

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What future for Bitcoin?

The speed of the Bitcoin network is unlikely to change in the future, which is not a major issue.

On the other hand, paying miners remains a real challenge in the medium to long term. Since its creation, Bitcoin has not managed to generate sufficiently strong, sustainable and growing activity on its network to compensate for declines in issuance. Transaction fees are paradoxically too high for simple payments, but too low to ensure sustainable remuneration of miners in the face of current levels of difficulty.

The development of secondary layers (layers 2) on Bitcoin could allow more users to employ their bitcoins while contributing to the remuneration of miners.

Although this is an almost taboo subject, network players could consider evolving the Bitcoin protocol to adjust the theoretical maximum quantity of bitcoins, thus allowing their production to continue with controlled inflation.

Finally, it is obviously impossible to predict with any certainty the evolution of Bitcoin, whether in terms of its successes or failures.

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