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Bitcoin Blocks are like Container Ships
Explaining Bitcoin's path to handling the world's transactions
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One of the alarming discoveries that awaits everyone early on in their Bitcoin educational journey is how few transactions the Bitcoin blockchain can handle.
Each block added to the Bitcoin blockchain is ~1MB. Approximately 4,000 Bitcoin transactions can fit into this 1MB block.
Since there is one new Bitcoin block added every 10 minutes on average, this suggests that Bitcoin can manage only ~7 transactions / second.
This is immensely problematic, as Bitcoin aspires to be the opens-source, digital money for the entire world. And this sticker-shock number is what has lured countless people into the false promises of altcoins with high transaction / second throughput.
The simple truth is Bitcoin’s path to scaling deliberately avoids increasing the size of those paltry 1MB blocks. Growing the block size limit is infeasible because it would bloat the size of the blockchain enormously (1000x or more). It also would introduce a dangerous precedent of changing Bitcoin’s core rule set. No, this battle has already been waged (the 2017 Blocksize War), and thankfully, small blocks and immutability prevailed.
Instead of scaling on the base-layer, Bitcoin is cleverly designed to scale by bundling many everyday transactions on a Layer 2 protocol (the Lightning network) into each base-layer, value-settlement transaction on the Bitcoin blockchain.
This allows the whole world’s transactional throughput to cram into just ~7 transactions/second.
Here’s the best analogy to understand how…
Bitcoin blocks are like container ships
The details of this metaphor (originally from Nic Carter) help explain Bitcoin's path to scaling up to handle the entire world's transactions.
In 2019, 802M containers were shipped. A large container ship holds 8,000 containers. If an average one holds 4,000 containers, this means ~200k container ship journeys per year. Bitcoin has ~210k/4 blocks per year.
The revenue generated by a container ship journey is the sum of fees charged for ~4,000 individual containers. When new Bitcoin issuance fades away in the coming decades, the revenue generated by a Bitcoin block will be fees from ~4,000 transactions.
There is 1,280 cubic feet of space in each container. That's enough to comfortably fit a car. But usually, a container carries more than one item. The space is large enough for 100 washing machines, or 18,000 stuffed animals.
The cost to ship one container from Shanghai to Los Angeles is ~$1,800. That means $1,800 per car, or $0.1 per stuffed animal. Similarly, the fee for a Bitcoin transaction can be shared across many inputs (what exchanges do) or by settling many Layer 2 transactions via a single base-layer transaction.
Even if an average Bitcoin on-chain transaction fee ends up costing a whopping $1,800, but represents the settling of 18,000 constituent Layer 2 transactions (via the Lightning network), the fee per transaction is $0.1.
In this scenario, the total fees per block would amount to $7.2M. That's roughly 40x the value of the newly mined Bitcoin in each block today (6.25 x $30k = $188k).
Visa makes ~$22B in revenue on ~185B annual transactions, or $0.12 per transaction. The above scenario would mean Bitcoin handling ~3.8T transactions per year, or 20x as many transactions as the Visa network.
That comes out to a Bitcoin throughput of 120,000 transactions / second – a far cry from the ~7 transactions / second that Bitcoin appears to offer on the surface.
In terms of transactional throughput, you can rest assured that Bitcoin can scale to handle the world’s transactional demands through the clever bundling of many Layer 2 transactions (via the Lightning network) into each of the base-layer transactions in each Bitcoin block.
In terms of costs to users, the above scenario would require users to spend $0.1 in transaction fees on a typical transaction – no concerns there.
Finally, in terms of revenue for the Bitcoin mining industry, the above scenario would amount to Bitcoin miners receiving $380B in transaction fees per year. That’s 40x more than they receive today from newly issued Bitcoin (the “block subsidy”). (210k/4 blocks per year * 4,000 base layer transactions/block * 18,000 Layer 2 transactions/base layer transaction * $0.1/Layer 2 transaction)
With regard to Bitcoin’s security budget into the future, there’s nothing to worry about. Bitcoin is secure with the current economic incentives of $188k in newly issued Bitcoin for each block (plus transaction fees). That’s all that’s needed in order to maintain Bitcoin’s security in the future when new Bitcoin issuance has faded. And yet, the above scenario represents a future where 40x as much revenue is generated for Bitcoin miners (vs. today) and typical transactions still cost just $0.1.
Remarkably, even this scenario where Bitcoin transaction fees are generating $380B / year (seems like an awful lot) would still be just ~1/4 of the value of today’s global container shipping industry (~$1.4T).
In other words, to maintain the ample security of the Bitcoin network that we have today, revenue for Bitcoin miners only needs to stay flat (albeit, shifting from block subsidy to transaction fees) at just 1/160th the value of the global shipping container industry.
Since Bitcoin stands to be the world’s preferred value settlement network, it will easily garner 1/160th the revenue of today’s container shipping industry.
Bitcoin block = container ship
On-chain transaction = container
Many Layer 2 transactions = many smaller items inside container
The Bitcoin fee market will develop fine, like a global shipping industry for digital value.
Don’t fall for any uninformed, surface-level assessments that claim otherwise.
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