On reducing the Bitcoin block size to 300kb

On October 3rd, 2010, early Bitcoin developer Jeff Garzik took to BitcoinTalk to introduce a patch which increases the block size to 7 MB. It was an initiative which Satoshi Nakamoto himself quickly dismissed, but the first time anyone proposed a radical change to the arbitrarily-set 1 megabyte limit for blocks.

In 2015, 2016 and 2017, some Bitcoin advocates thought that the only way to make the king of cryptos scale is to increase the block size. As the network kept on growing and more users began to adopt BTC as a mean of payment, it made sense to them to seek ways to support scalability. However, the attempts of Gavin Andresen, Mike Hearn and Jeff Garzik all failed under the names Bitcoin XT, Bitcoin Classic, and Bitcoin Unlimited – eventually, these initiatives dissolved into Bitcoin Cash, the first hard fork to effectively split the community on the scaling issue.

Now, just when it seemed like the block size debate had ended once and for all, as developers focus on the consolidation of the scaling solutions they picked, Bitcoin Core developer Luke Dash Jr. comes up with a unique and intriguing proposal: it’s time to reduce the block size to 300 kilobytes.

Wait, what? But why?

There are multiple reasons why this idea makes sense, given the scaling path Bitcoin took in the second half of 2017. First of all, the activation of SegWit increased the block weight, and BTC can have 2 MB blocks when necessary – and this, in return, significantly lowered network fees. However, this is only a compromise to maintain the amount of decentralization without hard forking the network or creating a precedent which disempowers regular users from running their own nodes.

Given the continuous growth of Bitcoin, the size of the blockchain is constantly increasing to a size that may soon become unsustainable for affordable consumer-level hard drives. Also, it’s getting harder and harder to synchronize your full validation node, and the time required will only increase. This is a major concern which may lead to a greater degree of centralization, which is highly undesirable.

On the other hand, the quick growth of the Lightning Network and the Liquid federated sidechain effectively take away some of the on-chain operations. Transacting through Lightning channels is faster, more private, and definitely scalable – to the extent that there’s a popular community meme about LN being “unfairly cheap”, just like SegWit in 2017.

Liquid also enables exchanges to trade between one another without bloating the main Bitcoin blockchain, and with an added layer of privacy which is granted by Confidential Transactions. By engaging an ever-growing number of exchanges, Blockstream’s solution takes a big load off of Bitcoin’s shoulders by creating a better medium for big players to settle their transactions.

Luke Dash Jr. has closely observed all these phenomena and became worried about the scalability of Bitcoin as a decentralized network. It’s not always about fees, but about allowing anyone with a consumer-level computer to run a full node. If the synchronization time is too high and the blockchain size is larger than most people can spare on their computers, then it’s more likely for enthusiasts to give up on the idea of running a node and leave it to enterprises (which is against what Bitcoin stands for).

Another issue proposed by miners as guardians of the network: if microtransactions take place on Lightning at “unfairly” low costs, and the blocks are able to double their size whenever the network requires it, then the ‘fee market’ is affected and the financial incentives take a massive blow. Since another reward halving is expected to happen in 2020, it will become unsustainable for many miners to keep their operations running unless the BTC price increases exponentially or they collect fees.

Luke Dash Jr’s solution to reduce block size via soft fork

Since Garzik’s proposal from 2010, the general consensus about block size modifications has been that a hard fork is required (which irreversibly causes chain splits between those who run the changes on their nodes and those who preserve the initial values). Likewise, the idea of reducing the block size theoretically involves the same kind of procedure.

However, Bitcoin Core developer Luke Dash Jr. has found a way to work around the issue by creating an experimental soft fork that is only temporary. The concept involves trying to demonstrate the validity of his theory for a limited amount of time (like, for instance, from August to January), and then finally settling for a direction towards which to stir.

Will bitcoiners largely benefit from the faster synchronization times? Will users adopt Lightning at a larger scale while exchanges switch to the Liquid sidechain, just to reduce operational costs? Will the miners receive an extra incentive to keep their operations running regardless of BTC’s price, knowing that they make up for their losses in fees? And last, but not least, will the number of Bitcoin nodes increase, thus exponentially improving on the network’s decentralization and preventing miners from ever trying to inflate the supply?

This initiative completely shifts the current game theory of Bitcoin, and everyone should consider it seriously in order to figure out if the consequences are exactly what everybody desires. If this UASF (User Activated Soft Fork) were to get deployed at a large scale tomorrow, it’s likely that many of the uninitiated users (who don’t know how to get on Lightning and would never run a node) will switch to altcoins with lower on-chain fees.

In a sense, pursuing block reduction in this infant stage of the Lightning Network is great news for the big blocker side of Bitcoin (BCH and BSV), but also Litecoin. Roger Ver can once again play the “fees card” and highlight how Bitcoin Core developers make their network implode with their focus on small blocks.

Bitcoin maximalists have long argued that expensive fees are a good sign for development, as they push for second layer adoption and prove that BTC is digital gold. However, there is still a large number of users who enjoy the idea of moving large amounts of money for the satoshi equivalent of 10 cents.

Community reactions

The beauty of Bitcoin can be seen in the community and its reactions to any change proposal. Fundamentally, anything which promises greater decentralization and faster synchronization for newcomers is very much in the spirit of Satoshi’s creation. However, this doesn’t mean that everybody is happy with the idea of limiting on-chain transactions.

One of the boldest advocates of the block reduction soft fork is John Carvalho, who openly expressed his support for Luke Dash Jr’s proposal and offered to run the soft fork.

Interestingly, SegWit2X advocate and Bitcoin Cash supported Vinny Lingham has also tweeted in favor of the block-reduction soft fork. However, one can speculate that his reaction is driven by the idea that some users will switch to altcoins due to the high on-chain transaction fees. If this is true, then we should expect more support and even pressure from the BCH crowd to proceed with this block size-reducing soft fork.

However, Luke may be a little too radical in his proposal, as his replies point out to the urgency of decreasing the block size and a situation where the community chooses between PayPal (as a symbol of centralization) and Bitcoin.

In contrast, cypherphunk Jameson Lopp has suggested that the reduction shouldn’t be arbitrary, but dynamic in order to preserve a certain fee. In his opinion, on-chain transactions should cost around $100 so that miners are constantly incentivized to keep their machines running, while small-amount use cases get moved to Lightning.

His comment is most likely sarcastic, as this “fee market” model contrasts the idea of a free market for fees, but the fact that a number of people agreed with the proposal proves that the debate is relevant and we’re going to see many more similar opinions in the coming months.

Soft fork the block size if you want a fork.

At this point, it seems very unlikely that the community at large will agree to adopt the soft fork. Nevertheless, the beauty of Bitcoin is given by the autonomy of network participants to make decisions for themselves while being part of the same chain.

While some enthusiasts will experiment with this new game theory which brings more speed and decentralization at the cost of paying bigger fees, others will remain conservative and appeal to Satoshi’s authority to set in stone 1-megabyte blocks.

What is certain at this point is that altcoins would greatly benefit from this initiative, as their existence would become justified and they would gain another argument to present themselves as improvements. Most of them don’t value decentralization as much, but to those who won’t be able to adapt to using the Lightning Network for microtransactions, these low-fee blockchains will seem just perfect.

Furthermore, experimenting with Bitcoin on-chain transactions will become too expensive, so rookies will probably buy small amounts of Bitcoin Cash, Litecoin, or Dogecoin to get accustomed to wallets and how cryptocurrencies work.

It’s essential to point out that Luke Dash Jr’s plan to reduce the Bitcoin block size requires a lot of education for the community so that every user learns about sovereignty, autonomy, and the Lightning applications. Given the fact that so many users still rely on custodial wallets and centralized exchanges to store their coins, it’s unlikely that it will work. Some people are just lazy and won’t run their own nodes to help the network, and this fact has to be taken into consideration.

The idea of running an experiment for a limited amount of time is pretty neat, but we must be aware that the outcome is also determined by the state of the market. In the middle of a bear market, the number of users who transact is significantly lower, and it’s hard to predict how the network would behave during an extended bull run when SegWit is activated on the 1-megabyte blocks and Schnorr signatures are potentially implemented.

However, increasing the decentralization of Bitcoin is essential in a time when traditional financial institutions get involved, and governments seem more eager to create regulatory frameworks. It’s a way of resisting external pressures and growing in a way which enables anyone to run a node. It’s definitely going to be interesting to see how this block-decreasing proposal plays out, and one can only hope that the community will find a common ground to agree on without once again splitting.

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