Extreme stress tests of Bitcoin scalability

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This post originally appeared on ZeMing M. Gao’s website, and we republished with permission from the author. Read the full piece here.

While BTC is artificially restricted to 5-7 TPS due to its peculiar ideology, the real Bitcoin according to Satoshi’s vision (Bitcoin SV) is vastly scalable. This article explores some thought experiments when Bitcoin SV scales to extreme levels.

Bitcoin SV (BSV) can scale to billion TPS of on-chain transactions, and many times beyond even that extreme level using payment channels and overlay networks. The price of BSV will rise due to demand and supply, but the mining economy can remain healthy while maintaining extremely low transaction fees.

A stress test of Bitcoin scalability

Because the block size of BSV is unlimited and its computational power for transaction processing enjoys unrestricted parallelism using UTXO, the only potential restraints to the BSV scalability comes from the limited supply of satoshis.

Imagine a future scenario as a hypothetical stress test for Bitcoin:

1 billion transactions per second (i.e., TPS 1 billion); the minimum number of sats required for each transaction reaches the floor level of 2 sats/tx only, one sat as a UTXO carrier, and another for network fee paid to miner.

(In comparison, the current TPS is lower than 100, with an average transaction requiring more than 500 sats.)

To process the 1 billion transactions per second, we need 20 bitcoins per second (1 billion x 2 sats /100 million sats per coin = 20 bitcoins).

Because there are 600 seconds in each block, we need 12,000 bitcoins per block (20 bitcoins/second x 600 seconds = 12,000 bitcoins).

Considering that there is a 100-block lockup period, we need 1.2 million bitcoins for the 100-block lockup period (12,000 x 100 = 1.2 million).

That requires over 5% of the total 21 million bitcoins for less than a day (about 17 hours).

Although in theory coins can be released into the circulation after the lockup period, it is unrealistic to expect such velocity, because a one-day turnover speed means that a Bitcoin mining economy with a money velocity higher than 365 (365 days/1 day). In comparison, the money velocity of a traditional economy typically ranges from 1 to 2.

It would be more reasonable to assume a 7-day turnover time, which is about 10 lockup periods. This would require 12 million bitcoins (over 50% of the total 21 million) to be reserved just for paying miners.

The above takes into consideration only the minimal number of sats required to carry UTXOs and to pay miners, which can be put in a category of infrastructure fees. The rest of the sats are needed for all kinds of other payments and utilizations, which are the real Internet of Value (IoV) economy supported by the Bitcoin blockchain, including peer-to-peer payments, payments for utility and trade, and tokenization.

The above scenario is clearly a stressful state. The system requires 50% of the total 21 million bitcoins to be in constant and fast circulation for paying the miners.

Therefore, it seems that the upper limit of Bitcoin SV’s layer-1 (L1) on-chain settlement is about 1 billion TPS. Beyond that, payment channels and layover networks will be required.

However, considering that the entire crypto currency today is about 100 TPS, while Visa card is about 1000 TPS on average, Bitcoin SV’s 1 billion TPS on chain (L1) is a very large future.

Further, because in theory up to 4.3 billion transactions in just a single payment channel are supported by each on-chain settlement, the total TPS capacity of BSV is practically unlimited.

On the other hand, if you find TPS in billions unimaginable, please see: Bitcoin’s L1 scale requirement, making estimates based on a paper published on Science Journal.

A stress test of Bitcoin price

Any stress on the Bitcoin supply will have an impact on the Bitcoin (BSV) price. But the Bitcoin price is likely to be determined by many market factors acting together, rather than mining economics alone.

For an analysis of the factors that affect the price, see Price matters. But here, let’s focus on the above extreme scenario where the bitcoin scalability is tested.

Because there are only 21 million bitcoins altogether, the above extreme scenario means a total turnover of the entire 21 million bitcoins in a few weeks just for making UTXOs and paying miners, which can be categorized as infrastructure fees.

But not all bitcoins can be used for making UTXOs and paying miners. Bitcoins are also needed for peer-to-peer payments, payments for utility and trade, and tokenization, etc., which constitute the real IoV economy. As estimated above, if 50% of the total bitcoins are available for making UTXOs and paying miners, these bitcoins then must have a turnover time of about 7 days.

Realize how extreme this is: a 7-day turnover speed means that a Bitcoin economy with a money velocity higher than 50 (365 days/7 day). In comparison, the money velocity of a traditional economy typically ranges from 1 to 2.

This certainly means a severe stress on the supply of bitcoins. The actual stress would be even higher, considering that:

(1) not all bitcoins are available to be circulated so quickly (because many bitcoins may be held in value store accounts or tied up in some other more permanent assets such as tokens);

(2) many transactions may involve more than just 2 sats; and

(3) peer-to-peer payments for utility and trade are likely to be made in sats as well.

The need for additional sats adds more stress to the coin supply.

Scenario: $100 billion daily non-mining payment transactions (in comparison, Visa card’s average daily payment volume is $30 billion). Only on-chain cash payments transactions are considered, not trading transactions, nor the exchange transactions that mostly do not happen on-chain. Temporarily assume all payments are made without using payment channels (see below for payment channels). Also, note that here we are considering only payments made in sats directly, not including other types of value transfer made using tokens created on the Bitcoin blockchain. Tokens can be unlimited, because theoretically, a single sat can be programmed to tokenize a large value such as an expensive artwork, a real property, a company share, etc.

In this scenario, even if the Bitcoin (BSV) price is $10,000/coin, it would require 10 million bitcoins (nearly half the entire stock) to be available for a daily turnover, requiring a money velocity that is hundreds of times higher than today’s fiat money velocity. A lower Bitcoin price would mean a proportionally higher number of bitcoins required, thus a higher velocity. Considering that many bitcoins will be held as value stores or tied up in some other more permanent assets such as tokens, 10 million bitcoins turning over daily for just cash payments (non-trading) will certainly cause an extremely high stress on the bitcoin supply.

The only way to alleviate such stress is that the Bitcoin price goes up. For example, if the BSV price is $100,000, the above scenario would only require 1 million bitcoins to be available for a daily turnover, equivalent to a money velocity tens (rather than hundreds) of times that of the common fiat money velocity. It would still create a lot of stress on the coin supply, but easier to conceive.

If bitcoin ends up having a kind of velocity comparable to today’s fiat money velocity, BSV price would need to be in millions of dollars in order to support $100 billion daily non-mining payment transactions. The reality is likely to settle somewhere in the middle.

The mining economy and the bitcoin price

In the above scenario (TPS 1 billion; 2 sats/tx, 1 sat for network fee paid to miner), the total economy of mining business equals to 10 bitcoins/second, or 86,400 bitcoins/day, 31.5 million bitcoins/year.

When the network reaches TPS 1 billion, the global mining business is almost certainly going to be valued in trillions, with annual revenues totaling in trillions.

If the bitcoin price at the time is $100,000 per coin, and if all mining fees for every L1 on-chain settlement in the above scenario is paid directly in sats, the total global annual mining revenues would be $3.5 trillion. Even then, the mining fee per on-chain settlement will be just $0.001. This is still very low for regular transactions. But it is likely that users running high-frequency transactions that require even lower transaction fees will opt for payment channels. For example, if two parties use a payment channel to conduct 1000 data transactions on average for every on-chain settlement, the cost for each transaction would be $0.000001, still 10 times lower than the “one thousandth of a cent” target.

However, if the bitcoin price at the time is much higher than $100,000 per coin, the total global mining revenue may become too high (making miners too rich) when L1 settlement reaches TPS 1 billion. In this case, the level of mining competition will increase, and as a result L2 solutions such as payment channels will start to be widely used before the L1 settlement reaches TPS 1 billion.

For example, if the Bitcoin price at the time reaches $1 million per coin, the L1 settlement may be limited by the market to TPS 100 million instead of 1 billion, so that the total global mining revenue may not become too high. The overall equilibrium of the economics is hard to predict, but the above scenarios show boundaries and interactive dynamics.

The actual transaction fees and the price of the sats (bitcoin) will both be determined by market competition, not to be preset by anyone. The bitcoin price is likely to be determined by many market factors acting together, rather than mining economics alone. See Price matters (analysis of the factors that affect the price).

Note that the above discussions of coin prices are not price speculations. They are hard mathematical facts based on concrete coin supply and demand scenarios based on purchases of goods and services, rather than speculative coin trading. The former is inelastic and predictable based on hypothetical scenarios of coin utilization, while the latter is driven by coin exchange market psychology only and completely unpredictable.

Payment channels

The above analyses show the Bitcoin (BSV) price being driven up under the coin supply stress when Bitcoin TPS reaches 1 billion TPS, even when the utilization of sats per transaction is optimized to the absolute minimum level.

Does it mean that Bitcoin (BSV) cannot further scale beyond 1 billion TPS?

The answer is no.

“Think channels and other agreements, consolidation and companies.”

-Craig S. Wright, private communication.

When the payment frequency gets too high, parties will likely establish channels using nSequence and nLocktime (see payment channels). Payment channels relieve the burden of on-chain transactions by moving small payments (nano-payments) to separate channels that do not require on-chain settlement until the time agreed by the parties.

Payments made using channels may seem to be tied up for a period of time, but do not get tied up beyond the channel settlements as they may immediately enter into recirculation once a channel settlement is made. This condition can be defined by the channel agreements.

Unlike Lightning Network which is an unreliable separate off-chain network (See Why Lightning Network is a dead end), bitcoin payment channels do not create a new network, do not involve intermediaries and multi-hops, and are therefore secure and suitable for nano-payments.

With payment channels and other agreements and consolidation, the total TPS of BSV can scale well beyond 1 billion if needed, to 1 trillion and more.

Why couldn’t BTC also use payment channels?

One might wonder why the BTC Core never even tried using payment channels, but instead went for Lightning Network (LN), which creates an unreliable separate network. (See Why Lightning Network is a dead end.)

It is not accidental, but determined by the ideology. Channels work for extremely high frequency payments. For all other payments that do not get to a high-frequency level between relevant parties for the parties to justify using a channel, the blockchain must be able to handle them directly without the help of channels. But BTC can never do that at all. It is a fact. So as a result, the BTC blockchain had to come up with a solution to at least ostensibly cover all kinds of payments, leaving only the high-value and low-frequency transactions to be settled on-chain. But once they’ve made that choice, creating a separate unreliable network and promoting multi-hops and multi-intermediaries becomes inevitable.

This is because this new network (LN) needs to cover all kinds of payments, not just high-frequency small payments between certain pairs of parties. Channels alone would not work for the type of payments that need to be covered by LN. This in turn is because a channel is set between a particular pair of parties having a specific payment relationship, and each channel works independently without the need of a network other than the Bitcoin network itself; but the BTC Core needed a network to create routes, liquidity and balances, hence necessitating the design of Lightning Network, which is fundamentally a separate non-blockchain network and a contradiction to the Bitcoin blockchain.

For BTC, the above result is inevitable and also self-inflicted because it is determined by its ideological choice for small blocks.

In contrast, BSV payment channels are direct agreements between the relevant parties to handle high-frequency payments between those same parties only. The relationship between the parties in each channel arises from an actual business relationship that exists in the real world and is not artificially created by a network that is beyond control of the actual parties. Bitcoin channels do not rely on a separate network, as the blockchain itself provides sufficient network effect.

Once again, it illustrates a universal truth: one errs not as a result of making a straight mistake in logic, but as a result of standing at a wrong position and/or going in a wrong direction in the first place. Position and direction determine everything. This is why highly intelligent people make stupid mistakes. For BTC, LN is fate, predestined by its ideology.

Disclaimer/Disclosure: Like everything expressed on this website, this is absolutely not financial advice. I am not a financial advisor. I only write to express my own understanding of the technology, the economics, the law, the business, and the related systems, mostly from a technical standpoint, and all for education only, not for financial advice. With regard to Bitcoin SV (BSV) specifically, I am a supporter of Bitcoin Satoshi Vision and believe it is the truthful and original Bitcoin. I am also a user and holder of BSV bitcoins. Therefore, consider either I have put money where my mouth is, or that my views are biased – it is up to you the reader, but I take no responsibility on your own decisions.

Watch: The BSV Global Blockchain Convention, LiteClient: Scaling Blockchain with Simplified Payment Verification

https://www.youtube.com/watch?v=ggbZ8YedpBE&t=22349s