In the bitcoin community, transactions take place on-chain. Transactions are recorded on the blockchain permanently. It’s been that way since the bitcoin network launched in January 2009.
In the future, however, that may no longer be the case. If BTC supporters get their way, the bitcoin network will add Lightning Network support in the future. This takes transactions off-chain. No longer will all bitcoin transactions appear on the blockchain.
BCH supporters, meanwhile, believe in a different approach. They believe in an on-chain scaling solution. Based on Satoshi Nakamoto’s original whitepaper and vision, bitcoin is a peer-to-peer decentralized form of electronic cash. That means on-chain transactions.
Today, the majority of the community backs BTC while a minority backs BCH. Nevertheless, both sides have active development communities and both have reached an uneasy truce.
Amidst this truce, Saad Imran published a blog post titled, “The Case for Scaling Bitcoin On-Chain.” In that blog post, Imran, the editor of Node Blockchain, explains the benefits of on-chain scaling solutions for bitcoin.
Imran’s blog post was just the introduction to a longer paper under the same name. That paper, which is currently in version 1.4, was published online on July 30, 2018 and dives deeper into the debate between on-chain and off-chain scaling.
On-Chain Versus Off-Chain Scaling
Imran sees on-chain scaling as “a simple proposed solution” for bitcoin’s scaling problems. Bitcoin’s blocksize is restricted to 1MB for on-chain transactions, which limits the number of transactions that can be posted in each block. By raising the blocksize limit, we can increase the number of transactions that can be processed in each block. This boosts scalability, raises the number of bitcoin transactions per second, and achieves scalability without sacrificing the original vision of bitcoin.
Imran, meanwhile, sees off-chain scaling as complicated and unnecessary:
“Off-chain scaling is a more complex solution, it proposes that transaction activity that is not as ‘valuable’ be processed off-chain [in separate, private channels] and ultimately settled on-chain at a later time.”
Imran describes the Lightning Network as a system that:
“utilizes simple smart contracts and a multi-signature wallet to set up payment channels between users to allow transactions to be executed off-chain.”
Imran then details the infamously convoluted process used by the Lightning Network: you need to pay a significant amount of money (0.05 BTC) to setup a payment channel with a retailer (say, your favorite coffee shop). Then, a smart contract will keep a tally of who owns what percentage of the original balance deposited by each participants.
The two parties in a Lightning Network transaction theoretically avoid fees during a daily transaction because they’re not using the bitcoin network: they’re using a centralized side-channel. However, you still pay transaction fees when setting up the network.
In any case, Imran is clearly a fan of on-chain scaling. He believes on-chain scaling holds three crucial advantages over off-chain scaling:
3 Advantages of On-Chain Scaling
The three core advantages of on-chain scaling include:
Larger Blocks and Higher Throughput On the Bitcoin Blockchain
“Increasing the block size allows more transactions to be processed within each block,” explains Imran. “Blocks are processed every 10 minutes and mined on-chain. Theoretically, if we moved from 1 MB blocks to 1 TB blocks, the throughput would increase by 1 million fold.”
Those who are against this BCH-style scaling solution make arguments about computing hardware not being able to keep up with the adoption rate of bitcoin. They claim hardware improvements are already at their limits and cannot be pushed any further, making on-chain scaling unrealistic.
Ultimately, Satoshi’s vision for the bitcoin network relied on on-chain scaling solutions. Here’s how he explained it in a post:
“The existing Visa credit card network processes about 15 million Internet purchases per day worldwide. Bitcoin can already scale much larger than that with existing hardware for a fraction of the cost. It never really hits a scaling ceiling. If you're interested, I can go over the ways it would cope with extreme size. By Moore's Law, we can expect hardware speed to be 10 times faster in 5 years and 100 times faster in 10. Even if Bitcoin grows at crazy adoption rates, I think computer speeds will stay ahead of the number of transactions.”
If you choose off-chain scaling, then you’re choosing a different vision for bitcoin than what Satoshi had envisioned.
What about Moore’s Law? Moore’s Law has famously stopped being true over the last few years. However, Imran proposes something different:
“If you refute Moore’s Law more generally as ‘hardware efficiency doubles every 2 years' you will realize Moore’s law is still alive and thriving.”
On-Chain Scaling Leads to Higher Security
“When using the LN for off-chain transactions, users must accept that the security in this environment is drastically weaker,” writes Imran.
With bitcoin transactions, you can relax knowing that your transaction has been processed and verified by the Lightning network. A network of miners have verified the authenticity of your transaction, as proven by a cryptographically-secured proof of work.
“It’s almost as if you are exchanging an IOI within the channel that gets settled on-chain,” explains Imran. “In this model, you are essentially reverting back to a trust-based system which bitcoin was created to disrupt.”
On-Chain Scaling Leads to “A Higher Degree” of Decentralization
On-chain scaling leads to a higher degree of decentralization, while off-chain scaling introduces centralization into the network.
This is one of the crucial arguments between BCH and BTC. BTC proponents argue that higher blocksize limits increase centralization because they only allow larger mining farms and servers to operate nodes. BCH proponents, meanwhile, argue that bitcoin was always going to end up in server farms, and that the economics of capitalism will ensure the network remains centralized.
Conclusion: Off-Chain Scaling Versus On-Scaling
Ultimately, BTC supporters argue that off-chain scaling and the Lightning Network are the best way forward, while BCH supporters argue that the bitcoin network is designed from the ground-up for on-chain scaling. Time will tell which version of bitcoin is the most future-proof.
Meanwhile, you can read Saad Imran of Node Blockchain’s full discussion of on-chain versus off-chain bitcoin scaling here.