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With Bitcoin Prices Rising Above $400, Mike Hearn Explains How to Scale Bitcoin to the Size of Visa

November 13, 2013 at 19:48 by BitcoinNews

Bitcoin prices are near another all time high set today of $429.89 on the Mt. Gox exchange. However, as the prices for bitcoin have risen fourfold over the past year, it’s notable that minimum transaction fees have also risen fourfold in cost for sending bitcoin. A minimum fee of 0.0005 XBT was worth $0.05 at $100/XBT, but is now worth $0.20 at XBT value of $400.

The network has gotten faster and bitcoin more widely adopted, but Bitcoin transactions have become more expensive  for no good reason, according to Mike Hearn, a lead Bitcoin developer, in an interview with the Washington Post. This is due to an arbitrary minimum transaction fee of 0.005 XBT set by lead developer Gavin Andreson a year ago, rather than one at the request of miners or one which has been negotiated by users and miners.

Author Timothy B. Lee’s blog “The Switch: Where Technology and Policy Meet” posed the problem today that “Bitcoin needs to scale by a factor of 1000 to compete with Visa. Here’s how to do it.” I’d recommend reading the full interview for a nuts-and-bolts understanding of how the Bitcoin network infrastructure works, and how solutions might be applied to Bitcoin’s exponential growth.

In short, the 7 transactions per second limit is not a fundamental one, but the result of the 1MB cap imposed by the Bitcoin network on block size. Right now, the network is only up to about 1 transaction per second, but this cap will likely be removed soon anyway in one of the next upgrades in favour of allowing miners to reject ridiculously bloated blocks by default. So rather than any system-imposed restriction on how large a mined block could be, it’s unlikely anyone will mine overly large blocks since the others would likely reject it.

In addition, Hearn also explains how lightweight clients like Multibit, which are technically called Simplified Payment Verification (SPV) nodes because they only grab the most recent portion rather than the entire Blockchain, are not really a big concern for the Bitcoin infrastructure. Meanwhile, the ease of adopting bitcoin, without the extra burden of a ~10 gigabyte download, has really helped to grow the user base over the past year as the Bitcoin Foundation encouraged the use of Multibit and similar SPV clients. Hearn further concluded:

It’s very cheap to rent servers these days. Virtualization has made it very cheap. So it’s completely feasible for an individual who has a job to run their own server and run a Bitcoin node on it. The full node does give you better security. If you’re running an online shop for example, it makes sense to run a full node. It’s really cheap. Your computer is running anyway.

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