Bitcoin System Limitations

As capable as Bitcoin may be as a payment solution, its shortcomings have allowed for thousands of other alternative cryptocurrencies (altcoins) to compete for a spot at the top. Some of the most notable of these drawbacks are included in this article.

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On-chain Transaction Speed

Bitcoin maxes out at around 4 – 5 transactions per second. For context, Visa does around 1,500 – 2,000 tps. To say transactions are slow to confirm on the Bitcoin network is an understatement. However, where Bitcoin lacks in performance it makes up for in network security and decentralization. 

Additional software that sits atop the Bitcoin architecture (a layer 2 solution) is currently being built to speed up Bitcoin’s throughput by performing many of the transactions “off-chain”. These transactions are eventually batched and settled on the main Bitcoin blockchain, increasing throughput by orders of magnitude.

Lack of Programmability

Being digitally native gives cryptocurrencies the unique ability to be a form of programmable money. In comparison to other cryptocurrencies, Bitcoin is the least flexible in this regard. While you can create basic programs that run on the Bitcoin network, other blockchains offer a much higher degree of functionality.

Similar to the layered approach to increase throughput, improved programmability can be achieved as another layer that sits upon the Bitcoin stack.

Lack of Privacy

Bitcoin is not private. Its ledger is actually completely open to the public to view, while the wallets associated with specific coins are pseudonymous. However, it is possible to link wallets back to the identity of the wallets’ owners. This allows blacklisting of certain bitcoins by exchanges, social engineering scams, and other problems. 

Some coin obfuscation tools exist (such as mixing), but complete fungibility at the base level is one of the pillars of a true currency that is missing from Bitcoin. 

Power Consumption

The use of computational power that secures the Bitcoin network is seen as wasted energy. Companies spend millions of dollars building complex mining facilities that operate just to race for new blocks. This form of energy usage has been looked down upon by environmentally focused initiatives. 

However, this has also pushed companies to build greener alternatives to generate electricity, such as using hydroelectric and geothermal energy sources. Cheaper energy makes bitcoin mining more profitable and it is speculated that this competition may continue to drive innovation in renewable energy sources.

Transaction Fees

Bitcoin’s transaction fee is currently sitting at around $2 – $3. However, Bitcoin has seen fees north of $40+. To be used as a daily means of payment, fees will have to come down drastically. Currently, bitcoin is not suitable as a medium of exchange for lower value items. To exacerbate the problem, Bitcoin is also programmed to move to a fee-only system once all bitcoins have been mined into existence. 

Layer 2 solutions seems to be the preferred method for microtransactions in the future, as many computations can be performed off-chain for a fraction of the cost.

Next Steps

If you feel prepared, take our Introduction to Bitcoin and Blockchain quiz:

  1. Binance Academy. (2020, April 24). Transactions per second (TPS). Binance Academy. Retrieved March 22, 2022, from https://academy.binance.com/en/glossary/transactions-per-second-tps

  2. Bitcoin Average Transaction Fee. YCharts. (n.d.). Retrieved March 22, 2022, from https://ycharts.com/indicators/bitcoin_average_transaction_fee

     
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