Blockchain is Slow and Expensive By Design

Most people, when presented with a new technology that is slow, expensive, or clunky, naturally assume it will get faster, cheaper and better over time. And this is usually a good assumption, as things like computers, the internet, smart phones, and electric cars have gone through this evolution for last half century.

But that didn’t happen with Bitcoin and other blockchain-based cryptocurrencies. In fact, today Bitcoin is?slower and more expensive than it has ever been.

Bitcoin, let us remember, was introduced over?14 years ago, so by now we can safely bet that Bitcoin’s speed and transaction cost isn’t going to be improved. The reason for this is not because of a failure on the part of Bitcoin’s original designers and its current maintainers. Quite the contrary, speeding up Bitcoin has been a key challenge since Bitcoin was introduced, and there has been intense amounts of money and time spent on this problem—but with no improvement.

So why can’t the brightest minds in the world, with rewards of billions of dollars at stake, solve this problem? Because blockchain is slow and expensive?by design.

To understand the reason for this, it's important to understand?why?Bitcoin (and thus the blockchain architecture) was designed the way it was.

The problem Bitcoin was designed to solve is not a problem many people have, which is to?resist government subpoenas into transactions. Bitcoin was, fundamentally, designed to be a currency for users who would risk prosecution by a government if they used existing means of transacting such as a credit card or a bank transfer.

In other words:

• Bitcoin was not designed to be cheaper than bank transactions: in fact its much more expensive than most — transactions can cost up to?30 dollars.
• Bitcoin was not designed to fast: in fact, it’s often hundreds of times slower than typical credit card transactions — it can take up to?30 minutes.
• Bitcoin was not designed to be easier to use: in fact, compared to a service like PayPal or Venmo for transfers, or a credit card for point of sale purchases, it’s actually?much more difficult to use when you use it natively.
• Bitcoin was not designed to be safer: thousands of consumers have?lost?significant amounts of their wealth?by losing their devices or passwords, or by being hacked.
• Bitcoin was not?designed?to be the speculative investment instrument it is today, even though that is now the predominate way Bitcoin is used now.

Why was blockchain designed to be so slow and expensive? Because of the problem it was trying to solve.

Bitcoin’s key feature—the one that allows it to accomplish its goal of thwarting government subpoenas—is that it is a?decentralized model, meaning there is no single governing body like a company or an individual who controls the data store that backs up Bitcoin.

Without any central authority guaranteeing the sanctity of the balance on each of Bitcoin’s blocks, a form of?popular vote?is required among the holders of Bitcoin’s data store.

In the case of Bitcoin itself, the number of servers is typically over 5,000 nodes. In simplified terms, if 2,501 or more of these nodes agreed about the state of Bitcoin’s blocks, then that representation would become the accepted state of the Bitcoin ledger (again, this is simplified for brevity here).

And while it might seem expensive to create a server farm of, say, 5,000 nodes and thus outvote the network in favor of your preferred ledger, remember there are?billions of dollars?at stake here: spending just a few million dollars to create a pool of a few thousand servers would be relatively straightforward for somebody pulling off such a billion-dollar heist.

Hence mere?participation?in the network cannot be relied upon to create a system resistant to such attacks (which all called, "51% attacks"): these nodes must also do?work?in order to prove their merit as a node in the network. This way, trying to outvote the Bitcoin network with your own set of servers would be astronomically expensive and effectively impossible unless you were a large nation-state.

(This model is called “proof-of-work”, which is the model used by Bitcoin and many popular cryptocurrencies. There are other models, which have their own technical limitations, which we won’t go into here).

Hence, Bitcoin has never been “enhanced” to be cheaper and faster, because?that goes against Bitcoin’s central goal?and it would require Bitcoin’s maintainers to abandon Bitcoin’s current architecture and essentially rewrite the entire system–and change its philosophy.

Some cryptocurrencies (notably?not?Bitcoin) make their transactions cheaper and faster by foregoing blockchain’s primary design goal of thwarting government subpoenas by?centralizing?their design. Technically speaking, however, this design decision is rather?bizarre: they still typically do not perform as cheap/fast as ordinary credit card or PayPal transactions, and yet they contradict the reason for using this complex architecture in the first place.

The?Haypenny transaction platform?was designed from the outset to be an extremely fast and nearly free means of value transfer on the internet. The Haypenny system scales to?millions of transactions per second?and transactions always only charged one half of a US cent (a “haypenny”). And transactions never take more than a few?milliseconds. Haypenny currencies not only undercut cryptocurrencies in speed and cost, but they also undercut every other means of transacting such as credit cards and payment services.

Haypenny is an example of what a system looks like when it’s been designed?from the very beginning?to be a system that can replace all traditional forms of transacting for every person in the world. Blockchain, on the other hand, is an architecture designed for a very specific need only a tiny number of people actually have.

Indeed, most consumers of Bitcoin and other blockchain-based cryptocurrencies use these products in a centralized way: they use a broker like Coinbase, an app like PayPal, or more recently, they invest in ETFs as they would any other security in their (centralized) brokerage account. Consumers don't care about "decentralization", and they are voting with their feet on this every day.

The future of digital currencies is centralized: architectures that can truly meet mainstream consumer demand for the billions of transactions that occur every day across the world. The blockchain architecture was never meant to solve this problem, and it is specifically and intentionally designed not to scale to anything close to the level necessary to achieve this vision.