Navigating a Changing Bitcoin Landscape: Present & Near-Future Challenges

Introduction

Bitcoin, the pioneering cryptocurrency, has revolutionized the financial landscape with its decentralized nature and trustless payment system. However, as the network has grown and faced various challenges, several shortcomings and concerns have emerged. This article aims to delve into some of the most relevant and critical issues surrounding Bitcoin's governance, consensus model, scalability, miner extractable value (MEV), limitations in scripting language, and recent challenges related to BRC20 tokens and Ordinals NFTs. By exploring these topics, we gain a deeper understanding of the complexities and ongoing developments within the Bitcoin ecosystem.

The Governance and Consensus Model of Bitcoin

Bitcoin, often hailed as a trustless payment system, has indeed solved the Byzantine General Problem in computer science, providing a decentralized network that eliminates the risk of double spending. However, it is essential to examine the trustlessness in the context of the group of individuals who have the power to change the core software.

Bitcoin Improvement Proposals (BIPs) play a crucial role in proposing changes to the Bitcoin core technology. These BIPs are essentially documents that outline the modifications and improvements to the protocol.

The process of Bitcoin Improvement Proposals:

1. BIP Submission and Structure: The submission of BIPs began in 2011, with the first BIP being submitted by Amir Taaki. BIP-1, authored by Taaki, established the structure and format for proposing changes to the Bitcoin protocol. Since then, a total of 110 BIPs have been added to the master branch.
2. BIP Status and Approval: Each BIP is assigned a specific status, such as Draft, Deferred, Withdrawn, Accepted, or Rejected. To become accepted and labeled as Final, a BIP must fulfill certain conditions. These conditions include following the format specified by BIP-1, including code implementations of the proposed changes, and gaining 95% support from the last 2,016 miners (equivalent to approximately 14 days of mining with 10-minute blocks).
3. Miners' Consensus Voting: Miners play a significant role in the consensus process. They have the power to vote for or against a BIP by including the appropriate data in their hashed blocks. Consensus is achieved when a BIP receives 95% support from miners, indicating their acceptance of the proposed changes.
4. Software Upgrade and Soft Fork: Upon consensus being reached, a BIP acceptance often leads to a soft fork upgrade. This upgrade requires community members, including exchanges, companies building payment technologies, and miners, to upgrade their versions of the Bitcoin software to accommodate the newly implemented functionality.

An example of a significant soft fork upgrade is the implementation of Segregated Witness (SegWit). SegWit was proposed through BIP-141 and BIP-148, and it brought significant changes to how Unspent Transaction Outputs (UTXOs) are created and spent.

The decision-making process for approving and implementing Bitcoin Improvement Proposals (BIPs) is heavily influenced by the mining capacity of participants, rather than the sheer number of individual miners. This dynamic can lead to a more centralized decision-making structure, with larger mining operations exerting significant influence.

Centralization Risks and High Entry Barriers for Mining

Bitcoin mining, the process by which new Bitcoins are created and transactions are verified on the blockchain, has faced challenges related to centralization and high entry barriers.

These factors pose a threat to the decentralized nature of Bitcoin and limit participation in the mining ecosystem.

1. Advanced Hardware Requirements: Bitcoin mining requires specialized hardware known as ASIC (Application-Specific Integrated Circuit) machines. These machines are specifically designed to perform the complex mathematical calculations necessary for mining. However, ASIC machines are expensive and continuously evolve to maintain a competitive edge. This creates a barrier for smaller miners who may not have the financial resources to invest in the latest and most powerful mining equipment.
2. Significant Electricity Consumption: Bitcoin mining is an energy-intensive process. ASIC machines require substantial amounts of electricity to power their operations and cool the equipment. As a result, miners tend to locate their operations in regions with low-cost electricity, such as areas with abundant renewable energy sources or countries with subsidized electricity. This concentration of mining operations in specific regions leads to geographical centralization of the network.
3. Cost of Infrastructure: Building and maintaining a mining operation involves not only purchasing ASIC machines but also acquiring suitable facilities, such as warehouses or data centers, to house the equipment. Additionally, the cost of cooling systems, electrical infrastructure upgrades, and security measures can be significant. These financial barriers make it difficult for individuals or smaller entities to compete with large-scale mining operations.
4. High Taxation and Regulatory Oversight: Bitcoin mining operations face varying taxation policies and regulatory oversight across jurisdictions. Some governments have introduced specific taxes targeting the cryptocurrency industry, while others have outright banned mining activities. These taxation measures, when implemented, can place an additional financial burden on miners, creating barriers to entry and potentially favoring larger operations with better resources to handle the tax implications.

Scalability Limitations: SegWit, Lightning Network & More

One of the most significant hurdles for Bitcoin is its scalability. The current protocol allows for the creation of a new block approximately every 10 - 20 minutes, with each block limited to a size of 1MB. This limitation translates to a theoretical maximum of seven transactions per second (TPS). In comparison, traditional payment processors like Visa can handle an average of 24,000 TPS.

The scalability limitations of Bitcoin's protocol have become more pronounced as the network experiences increasing adoption and usage. The limited block size and transaction processing capacity have resulted in network congestion, higher transaction fees, and longer confirmation times. As more users and businesses join the Bitcoin ecosystem, these challenges become more evident and pose obstacles to its widespread usability as a global payment system.

To address these scalability limitations, several remedies have been proposed and implemented.

One of the notable solutions is Segregated Witness (SegWit), which separates the transaction signature data from the transaction data, allowing for more efficient use of block space. This optimization has the potential to increase the number of transactions that can be included in each block and alleviate network congestion.

Despite the fact that SegWit transaction adoption in the Bitcoin network is increasing and reached an all-time high of more than 65% at the beginning of 2020, possible adaptations of the Bitcoin network take a much longer time than those in altcoin networks, owing to the sheer significance and size of Bitcoin - there is too much at stake. On another note, not everyone supports SegWit transactions, even now.?

The continuous scaling debate has likely been the main reason behind several hard forks off the Bitcoin blockchain over the last few years. The most prominent of these forks was the?Bitcoin Cash?hard fork, which took place on 1 August 2017. Bitcoin Cash forked again on 15 November 2018 and increased the network’s block size limit from 1MB to 8MB.?

Another proposed solution is the Lightning Network, a layer-two scaling solution built on top of the Bitcoin blockchain.

The Lightning Network enables off-chain transactions between participants, reducing the load on the main blockchain and improving scalability. By conducting transactions off-chain, the Lightning Network can facilitate faster and cheaper microtransactions. While bringing significant advancements to the scalability and cost-efficiency of the Bitcoin blockchain, it is not without its challenges.

1. Incomplete Resolution of Transaction Fee Problem: The Lightning Network has been touted as a solution to the rising transaction fees on the Bitcoin network. However, it doesn't completely solve the issue. While off-chain transactions on the Lightning Network can reduce fees, there are still costs associated with opening and closing payment channels on the main blockchain. Additionally, routing fees for transferring payments between channels can discourage participants from facilitating transactions. This limits the effectiveness of the Lightning Network in significantly reducing transaction fees.
2. Susceptibility to Fraud and Malicious Attacks: The Lightning Network requires participants to be online at all times to send and receive payments. This exposes them to the risk of theft if their private keys are compromised. Furthermore, there is a risk of fraudulent channel close, where one party closes a channel prematurely and steals the funds. Offline transactions and prolonged absence of one party can increase the likelihood of such fraud. Additionally, the congestion caused by a malicious attack can prevent participants from retrieving their funds in a timely manner, further highlighting the vulnerability of the Lightning Network to attacks.
3. Impact of Bitcoin's Price Fluctuations: Bitcoin's price volatility poses challenges for the Lightning Network to gain mainstream traction as a method of payment. Businesses and individuals using the Lightning Network for transactions face exchange risks due to the need to convert fiat currency to Bitcoin at fluctuating prices. This uncertainty in pricing makes it difficult for companies to price their products accurately and can deter widespread adoption of the Lightning Network as a payment method. Traders and users can leverage these price discrepancies to generate profits by taking advantage of favorable exchange rates within the Lightning Network's payment channels, introducing further market complexity and may contribute to even more price volatility.

Additionally, proposals for increasing the block size have been put forward to accommodate a larger number of transactions per block. However, increasing the block size comes with trade-offs, including increased storage and bandwidth requirements for network participants, adding even more potential centralization risks.

Challenges in Implementing Bitcoin Network Upgrades

Efforts to improve the upgradability process in the Bitcoin network can indeed be extremely idealistic and challenging to implement due to several factors, complex and time-consuming process.

The Bitcoin community is composed of individuals and organizations with various interests, perspectives, and priorities. These differing interests can lead to disagreements and conflicts when it comes to proposed changes or upgrades to the protocol. Reaching a consensus that satisfies the majority of participants can be challenging, and finding common ground on technical, economic, and philosophical aspects of Bitcoin can be an arduous task.

Making changes to the Bitcoin protocol involves highly technical considerations and expertise. The potential risks associated with upgrading the protocol require thorough testing and analysis to ensure the stability, security, and integrity of the network, and must be carefully evaluated to avoid unintended consequences or vulnerabilities that could compromise the network.

Bitcoin's economic and incentive structures can also present challenges to implementing upgrades. Miners, as explained before, play a major role in the network and may resist changes that could potentially affect their profitability or disrupt their operations. Coordinating incentives and aligning economic interests among different participants can be a complex task.

The decentralized nature of Bitcoin also means that any changes to the protocol must be approached cautiously. The potential impact of upgrades on the network's security, stability, and user experience requires a risk-averse mindset to ensure that unintended consequences are minimized. This can lead to a more conservative approach to upgrades, further prolonging the implementation process.

Design Flaws in Antminer S19 Miners

In March 2023, Bitcoin mining company Compass Mining highlighted significant concerns regarding the ASIC design of the Antminer S19 miners. Three critical flaws were identified:

• Absence of a Peripheral Interface Controller (PIC): Crucial for individually interfacing with each hashboard in ASICs, the absence of PICs implies that a single hashboard's failure could lead to the complete unit's failure.
• Use of Aluminum Plating: A shift from laminate material to aluminum plating on hashboards could lead to overheating, resulting in higher failure rates compared to those built on Printed Circuit Boards (PCBs). This transition is expected to escalate service and maintenance costs while exacerbating ASIC failure and underhashing.
• Component Concentration: Clustering of components on one side of the board, in conjunction with the aluminum plating, could induce convective heating within the chassis. This, in turn, could further contribute to higher failure rates. These issues underscore the necessity for continuous improvement and rigorous testing in mining hardware design.

Environmental Concerns, Energy Consumption & Regulation

Bitcoin's Proof of Work (PoW) consensus mechanism requires considerable computational power, resulting in high energy consumption. With an estimated annual usage of 130 TWh/year (based on BTC current average price), concerns over Bitcoin's long-term sustainability and environmental impact are warranted.

The introduction of the Digital Asset Mining Energy (DAME) tax, as proposed in President Biden's budget for the 2024 fiscal year, escalates concerns surrounding centralization in Bitcoin. This tax, amounting to 30% of the energy used in cryptocurrency mining, could impose additional entry barriers for smaller miners, potentially concentrating Bitcoin mining power.

This tax aligns with the growing Carbon Zero agenda pursued by the G7 countries and global organizations like the World Economic Forum (WEF) and the International Monetary Fund (IMF). These entities are increasingly prioritizing environmentally friendly practices in their policy recommendations and regulatory frameworks.

The G7, WEF, and IMF have been instrumental in influencing global legislation on environmental matters. They advocate for a global transition to green energy and carbon-neutral technologies, pressuring industries, including cryptocurrencies, to comply.

This is reflective in the mounting regulatory pressures on Bitcoin's energy-intensive Proof of Work (PoW) mining method, as it directly contradicts these Carbon Zero objectives.

As a result, a push towards Proof of Stake (PoS) methods is gaining momentum. PoS is deemed more energy-efficient and sustainable compared to PoW. However, this switch could radically transform Bitcoin's regulatory classification. PoS has implications that extend beyond energy use, as this consensus algorithm may cause Bitcoin to fall under new categories of securities laws globally.

In a PoS system, participants 'stake' their coins to be chosen to validate transactions and add new blocks to the chain. This process could be interpreted as an investment with the expectation of future returns, which is the definition of a security under many jurisdictions. If Bitcoin were to adopt a PoS model, it could be regulated under securities law, a significant shift from its current status.

The reclassification would pave the way for mainstream financial institutions and large banks to participate more actively in the Bitcoin ecosystem. Securities are well-trodden territory for these institutions, and Bitcoin's entry into this space would create a familiar landscape for them to navigate. However, it could also result in Bitcoin, a currency created to decentralize finance and resist censorship, falling under the regulatory control of traditional banking systems, entailing profound implications for Bitcoin's role as a decentralized currency and its future trajectory in the global financial landscape.

Limited Functionality of Bitcoin's Scripting Language

One of the notable limitations of Bitcoin is its scripting language, which lacks Turing completeness. This limitation significantly restricts the computational capabilities of Bitcoin and poses challenges for the development of complex decentralized applications on its blockchain.

Unlike Turing complete programming languages, Bitcoin's scripting language is designed to be simple and secure, focusing on enforcing basic rules for transaction spending. It primarily supports basic operations such as signature verification and conditional spending based on predefined conditions.

However, due to the absence of loops, limited operations, and the lack of support for recursion and function calls, Bitcoin's scripting language falls short in handling more complex computations required for sophisticated applications. It is not suitable for implementing advanced algorithms or executing intricate calculations that may be necessary for a wide range of use cases.

While Bitcoin's scripting language's simplicity and focus on security are advantageous for its core function as a decentralized digital currency, it hampers the versatility and functionality needed for a broader range of applications.

BRC-20 Token and Ordinals NFTs Issues

The integration of BRC20 tokens and Ordinals NFTs has introduced new challenges to the Bitcoin network following the Taproot upgrade. These additions have contributed to increased transaction costs and heightened network congestion, resulting in an unprecedented backlog of over 400,000 transactions in the mempool. As a consequence, the Bitcoin community has become divided on how to address these issues, leading to heated debates and differing opinions.

The integration of BRC20 tokens, which are smart contract-based, has led to larger transaction sizes compared to simple BTC transfers. This increased transaction size occupies more space in each block, and since Bitcoin's block size is limited to 1MB, it restricts the number of transactions that can be processed in each block. As a result, BRC20 tokens compete for the limited block space, leading to network congestion and a 'bidding war' for transaction prioritization. Users are forced to pay higher fees to ensure their transactions are processed promptly.

The congestion caused by the influx of BRC20 transactions results in a reduced overall throughput of the network, leading to delays and putting strain on node resources. Nodes must validate and process these transactions, leading to higher computational and storage requirements for node operators. This increased resource demand can potentially impact the overall health and efficiency of the network.

Additionally, the integration of Ordinals NFTs has added further complexity to the network. With the unprecedented backlog of transactions, the Bitcoin community is divided on how to address the challenges posed by these new additions. Some argue that the high fees and congestion are necessary to protect the network from spam attacks, while others express frustration over the impact on new users and the ability to onboard them effectively.

The situation surrounding BRC20 tokens and Ordinals NFTs has garnered significant attention. The launch of "BRC-20," an experimental implementation of Ordinals, led to a surge in inscription activity, with a single-day peak of about 31,700 inscriptions recorded. This development has sparked excitement and controversy within the Bitcoin community, expanding the possibilities and raising questions about the future direction of the network.

Despite the heated debates, there are individuals who believe that these issues have been warned about for years and that Bitcoin will adapt and find solutions to overcome these challenges. However, the current situation highlights the need for careful consideration and potential adjustments to ensure the scalability and efficiency of the Bitcoin network in the face of increased adoption and the integration of complex tokens and NFTs.

Miner Extractable Value (MEV) Issues

Miner Extractable Value (MEV) has raised concerns within the Bitcoin network due to its potential implications. MEV allows miners to prioritize transactions based on their potential profits, which introduces the risk of unfairness and manipulative practices. This goes against the core principles of Bitcoin, which aims to create a decentralized and unbiased financial system.

The concept of transaction neutrality is a fundamental principle of Bitcoin. It ensures that all transactions are treated equally, regardless of their financial incentives or the interests of miners. This principle helps maintain a level playing field for participants and promotes trust in the network's integrity.

However, with the emergence of MEV, miners have the ability to prioritize transactions that offer higher profits, potentially at the expense of other transactions. This selective inclusion of transactions can disrupt the fairness and neutrality of the network, favoring certain participants or allowing miners to engage in manipulative practices.

MEV introduces the possibility of front-running, where miners can exploit their position to profit from trading activities by placing their own transactions ahead of others. This practice can lead to market inefficiencies and undermine the trust and transparency that Bitcoin strives to uphold.

Furthermore, MEV can create incentives for miners to engage in activities that may compromise the security and reliability of the network. Miners may be tempted to collude or engage in transaction censorship to further their own financial gains, potentially eroding the decentralized nature of the Bitcoin network.

To maintain the integrity of the Bitcoin network, it is crucial to address the challenges posed by MEV. Ongoing research and development efforts are focused on finding solutions that mitigate the risks associated with MEV and ensure a fair and transparent transaction ordering process.

Moving Forward

As Bitcoin continues to evolve and face various challenges, it is essential to recognize the ongoing developments and complexities within its ecosystem.

In conclusion, the road ahead for Bitcoin is paved with complexity, but also opportunities for growth and innovation. Continuous research, open dialogue, and collaborative efforts are essential to ensure Bitcoin's success as a decentralized and resilient financial system.