What Are The Challenges Ahead for Bitcoin?

This year marked Bitcoin’s 15th Birthday. Since then, the utility and core properties of Bitcoin have become increasingly clear to hundreds of millions of people. Bitcoin is permissionless, decentralized, peer-to-peer, allows digital ownership, and is censorship-resistant. If you own Bitcoin, you don’t need to ask anyone’s permission to own funds or make transactions. No one can censor your actions. This is a revolutionary idea enabling digital property rights, reinventing the exchange of value, and reshaping the role of intermediaries. 

Humanity strives for freedom, and that’s exactly what Bitcoin offers. For that reason, I believe mainstream adoption is inevitable, but before it reaches those heights, there are some critical challenges to address: security and scalability. 

As I’ll explain, these two challenges are closely linked. I’ll focus primarily on technical aspects, without addressing regulatory or geopolitical questions.

On the security of Bitcoin 

First, let’s explain how the security of Bitcoin works. What we refer to as network security is essentially the trust that the chain is not altered and no one is cheating. This trust is ensured by a decentralized consensus mechanism. All the nodes in the network run the same protocol (Bitcoin) and validate that the current chain is correct. By ‘correct,’ I mean that the transactions are properly signed with the appropriate keys, that no one is spending more than they own, and that no bitcoin is spent twice.

Miners play a crucial role in the security of the Bitcoin network. They build the blocks and strengthen the network’s security by participating in the creation of the longest chain, which is considered valid. The mining process relies on calculating multiple hashes: the first miner to find a hash with a certain number of leading zeros earns the right to validate the block and receive the associated Bitcoin reward. This reward, the only mechanism for creating Bitcoin, is programmed to halve every four years.

Miners must invest capital to set up mining machines that consume large amounts of electricity. This leads to a discussion on Bitcoin’s energy consumption: contrary to popular belief, miners are rational actors. They only mine if it’s profitable, meaning they seek to buy electricity at the lowest possible price. Typically, they also purchase surplus electricity no one else wants, helping stabilize the grid.

The more miners there are—or more precisely—the bigger the increase in hashrate devoted to mining, the more secure the network is. It’s all about the computational power required to find blocks: the more energy spent, the more secure the network becomes. The advantage of Bitcoin is that energy cannot be counterfeited. 

Let’s say that, tomorrow, someone discovers a way to mine a million times faster without consuming energy. Relying on the consumption of energy, a resource that cannot be faked or obtained for free, is an excellent way to ensure that cheating the system as a miner would be financially and practically pointless.

The Security Challenge: The Problem with Miners’ Rewards

Bitcoin’s security issue lies in the fact that the Bitcoin reward halves every four years, as this graph shows:  

Unless the price of Bitcoin doubles at the same rate, this results in fewer miner rewards, and thus a less secure network. So far, this hasn’t been a problem, but it’s reasonable to believe Bitcoin’s price may not continue this trend indefinitely. Eventually, dwindling miner incentives could pose a risk to the network’s security. Fortunately, Bitcoin founder Satoshi Nakamoto thought about everything, as indicated by this quote from the Bitcoin Whitepaper:

“In a few decades, when the reward gets too small, the transaction fees will become the main compensation for nodes. I’m sure that in 20 years, there will either be a very large transaction volume or no volume at all.”

In Satoshi’s plan, this aspect was taken into account. Satoshi’s idea was that miners would be compensated by transaction fees, a crucial way to maintain the security of the protocol.

Another key challenge for Bitcoin: scalability

Bitcoin is far from being fast. In fact, it is really slow. It’s generally estimated that it can process about 7 transactions per second (Tx/sec). Although this figure is an approximation based on the space available in a block and the average space taken per transaction, it gives a good idea of the network’s capacity. To put this into perspective, Visa processes around 2,000 transactions per second on average, with peaks reaching 20,000 Tx/sec. The difference is enormous. Do we really need such a high throughput? Probably not. However, 7 Tx/sec remains extremely limited. If we imagine that 8 billion people use Bitcoin, this throughput would translate to only 2 transactions per person… for their entire life.

Some will say that the Lightning Network is the solution to Bitcoin’s scalability challenges. Indeed, Lightning is very scalable, allowing faster peer-to-peer transactions by processing much of the transaction data off-chain. 

While it’s an elegant solution, it also has certain limitations. The security model is not that simple: users must stay connected at all times and monitor the chain to avoid any attempts at fraud. The Lightning Network is trustless, but the security model relies on the fact that you need to verify that you’re not cheated. Moreover, payment channels have limited capacity, and increasing this capacity requires going back on-chain. This is a real constraint, as the goal is to stay off-chain almost all the time. In fact, the Lightning Network allows to factor a few off-chain transactions in one on-chain transaction. Although it’s an optimization, it doesn’t solve the primary problem.

What happens if the scalability problem is not solved? Transactions on the main blockchain will become very costly and limited in number. This could encourage users to turn to alternatives like ETFs or WBTC on an Ethereum Layer 2 solution.

Are Bitcoin Layer 2s the Solution?

In my opinion, the most promising solutions to improve Bitcoin’s scalability lie in the creation of true Layer-2s (L2) that settle directly on the Bitcoin blockchain. 

We can observe and learn from similar innovations on the Ethereum network. For example, a layer 2 solution using rollups operates via a dedicated blockchain with its own rules and a coherent state—while keeping a connection to a layer one blockchain. Essentially, a layer 2 of this type will submit a condensed version of its state to the main chain, whether it’s Ethereum or Bitcoin.

However, the question of the validity consensus for these L2s remains open. Generally, a centralized entity generates this state. When it comes to validating this state, there are two main approaches: optimistic rollups and validity rollups.

Optimistic Rollups

Optimistic rollups assume that everything is going well and that the central entity is trustworthy, creating valid blocks. However, if this trust is questioned, there is a 7-day period to submit a fraud proof. This proof is recorded on the blockchain and can result in a rollback to the previous block’s state, along with a financial penalty (slashing). The current problem is that most optimistic rollups on Ethereum have not yet implemented these fraud proofs, making them reliant on a centralized entity. They are currently not secure, and this creates a finality problem. 

Validity Rollups

Validity rollups work quite differently. The central entity of the Layer 2 (L2) creates a state and an associated validity proof. This proof ensures that the transactions comply with the established rules: no one has spent more than they own, no double spending, etc. The blockchain then verifies the validity of this proof. This is made possible by zero-knowledge proofs (ZK proofs). This branch of mathematics allows properties to be demonstrated without revealing any contextual information. For example, I can prove that I am 18 years old without disclosing my exact age, or that I earn less (or more) than you without revealing my salary.

In the context of validity rollups, the interest lies not so much in the non-disclosure of the L2 state, but rather in the fact that the validity proof verification is simple, and fast, and the proof is succinct. Thanks to this conciseness, it becomes possible to carry out this verification directly on-chain. In summary, the central entity creates validity proofs for the L2 state, and Ethereum handles their verification.

Are Rollups compatible with the Bitcoin Protocol?

In the long term, Bitcoin will need to address challenges related to its security budget while dealing with scalability issues. The network is slow and can only handle a limited number of transactions per second. 

Using Bitcoin as a settlement layer would be ideal, given that it is the network offering the highest level of security. However, Bitcoin does not allow for the execution of arbitrary calculations like Ethereum, which limits its use in this context.

Projects such as BitVM are attempting to solve this problem. This level of abstraction allows code execution including the implementation of fraud proofs. The main drawback is that these proofs would take up a lot of space on the blockchain, often requiring more than one block, causing high transaction fees. The advantage of BitVM is that it requires no modification to the Bitcoin protocol.

Another strategy is to introduce covenants. Without going into the technical details, covenants allow conditions to be expressed in Bitcoin’s scripting language. This opens the door to new possibilities, such as verifying zero-knowledge proofs (zk proofs) on-chain. A particularly discussed opcode at the moment is OP_CAT, which would allow for proof verification directly on the blockchain.

In my view, to overcome these obstacles we must develop Layer 2s capable of executing a large number of transactions per second while settling on the Bitcoin chain. Optimistic rollups offer another option (of which I am somewhat skeptical). 

We can only hope for a new opcode for verifying ZK rollups in the future. But in the meantime, we may have to settle for OP_CAT.

Concluding Remarks

While the network’s security model has proven robust, diminishing rewards for miners introduce security challenges, and require a future transition to new models already anticipated by Satoshi. Similarly, scalability limitations must be overcome to support mainstream adoption, with Layer-2 solutions like rollups offering promising solutions. The ongoing development of Bitcoin and its ecosystem will be crucial in ensuring its resilience and ability to scale.

Ultimately, Bitcoin’s journey toward mainstream adoption will require addressing two fundamental challenges: security and scalability.