In the first article of this blog, we presented Bitcoin as the first 100% digital currency, which aspired to be the new means of payment for the whole of society, with a secure, transparent and efficient structure. One of the keys to such security was what we called the consensus algorithm, which was nothing more than the set of rules that all participants in the Bitcoin network had to follow in order to consider a block of transactions as valid. This algorithm is, in the case of Bitcoin, the Proof of Work, and in the following paragraphs we will see how it works.
This algorithm basically consists of solving a mathematical problem (based on the “hash function”) for which a computer with great computational power is necessary. Participants have a maximum of 10 minutes to solve the problem and, after that time, the first to have solved it correctly chooses which transactions are incorporated into the network, charges a reward in new bitcoins for their work (hence the concept of “ mining ”), and the process starts over. The problem is that this mathematical challenge is increasingly complex, so the power required is increasing. This implies higher levels of security, but it also reduces the number of participants with sufficient resources to solve the problem.
By progressively reducing the number of participants who can solve the algorithm, decentralization (the absence of control by a central entity), which was one of the initial objectives of the coin, is affected. Little by little, the participants with the best technological resources are monopolizing the verification of new transactions, in a process that also has a very high energy cost.
On the other hand, the fact that this algorithm is so secure (at the cost of the resources it requires) makes it slow to process transactions. Each block of transactions takes 10 minutes to be “mined”, which, given the number of transactions that can fit in a block, means that barely 7 transactions can be verified per second, far from the 56,000 transactions per second that can reach be processed by traditional credit / debit card systems.
This large-scale processing difficulty is the other major area of improvement for the algorithm, scalability (the ability to grow users without affecting network performance). A process that has so many problems to grow at the rate that its users do, has very difficult to compete with traditional systems because it is the new universal means of payment. That is why today, both Bitcoin and other cryptocurrencies continually seek solutions to take a step forward in speed and processing capacity without negatively affecting the performance and security of the network.
Some proposed solutions involve increasing the size of the blocks, using other less expensive algorithms, etc., but at the moment there is no universal solution for this problem, also taking into account that it is a very new technology and whose use cases they are still in very early stages of development.