Bitcoin and Ethereum are both underutilising their networks

Is the currency of the future stuck in the past?

A longitudinal study of the bitcoin and Ethereum networks from 2015 to 2017 has concluded that both are seriously underutilising their nodes in different ways.

The report, due to be presented at the Financial Cryptography and Data Security Conference in February, suggests that both networks might be missing some relatively easy solutions to their congestion problems, and subsequent high fees and slow transactions.

Bitcoin

In the case of bitcoin the report observed that the median bandwidth for a bitcoin node has almost doubled since 2016, increasing by a factor of 1.7 times.

This suggests that bitcoin could increase its blocksize by at least 1.7x to carry more transactions without increasing the rate of orphan blocks.

• What are orphan blocks?

  Orphan blocks on bitcoin are basically duds. They're blocks that were mined, but cannot be connected to any parent in the longest blockchain.

  It's kind of like mining an out-of-date block that no one needs.

  There's no mining reward for digging up orphan blocks, and the chances of mining an orphan block decrease with more mining power. This is one of the reasons it's almost impossible to actually earn bitcoin mining rewards without an enormous amount of energy and processing power.

The other main argument against an increased blocksize was that it would make storage and CPU cost-prohibitive for miners and anyone operating a full nodemore info button. However, the report also points out that these costs were fairly irrelevant in the first place, and that the cost of hardware has decreased significantly over the last few years.

"To date, we have seen no sound, quantitative arguments for any specific value of the maximum block size in Bitcoin," the report says.

Essentially, the report says there is no technical reason why bitcoin can't simply increase its block size to speed up transactions and clear the network, as Bitcoin Cash did when it forked off with an 8MB block size on 1 August 2017. But having already decided against it, it seems unlikely that the bitcoin community would agree to increasing the block size now.

With that easy option off the table, bitcoin might be locked into an expensive and technically difficult upgrade path through the Lighting Network instead.

The report also noted that around the same time as it resisted a larger block size, the bitcoin community seems to have "adopted the narrative that it is a Store of Value... an investment vehicle where early adopted are compensated by late comers."

Ethereum

The report also found that Ethereum has a much higher uncle rate than bitcoin, which suggests that Ethereum is putting a lot of hashing power to waste.

• What are uncle blocks?

  An uncle block on Ethereum is similar to an orphan block on bitcoin. The main difference is that Ethereum still has a use for these, while bitcoin discards them.

  As such, Ethereum still rewards miners who dig them up and still attaches them to the blockchain.

  The advantages of this are that:

  • It makes it more feasible for small miners to earn rewards, thereby making the network more decentralised.
  • It facilitates use of the Ethereum GHOST (Greedy Heaviest-Observed Sub-Tree) protocol. This is essentially a system by which branches of the blockchain other than the longest can still contribute to the security of the network.

  The downside is that uncles aren't carrying any transactions, and a very high uncle rate will bloat a network and slow it down with unnecessary data.

The proposed solution was a relay network. These relay networks are almost exactly what they sound like: a system for ferrying blocks among miners and full nodes and reducing the wasted effort. These have been found to decrease the number of orphaned blocks when used on the bitcoin network and may have a similar effect on Ethereum.

Both bitcoin and Ethereum are looking at their own solutions instead. In bitcoin's case, it's the Lightning Network, and in Ethereum's case, it's the Casper.

• Lightning Network: A system for carrying smaller transactions off the main blockchain, to be settled up before transmission to the main bitcoin blockchain.

It remains to be seen how successful and effective either of these will be.

The Casper update for Ethereum might be such a fundamental shift that investing in relays now wouldn't make a lot of sense, but in the case of bitcoin it's potentially looking more like inefficiency by design.