Letter #3: Block Size - What Is It Good For?

Dear Readers,

In the early days of Bitcoin, fans of the cryptocurrency saw it as a way to replace the need to use banks, credit cards, or cash in day-to-day transactions. Want to buy your favorite hamburger when you go out? Use Bitcoin. Want to buy some roses for Valentine’s Day? Use Bitcoin. The dream of these early adopters was that Bitcoin’s ability to make quick, secure, pseudonymous transactions would make it a better option for use in everyday transactions. Fast forward twelve years and the narrative behind Bitcoin has completely changed. If you spend any amount of time in the Bitcoin community, you’ll soon hear that Bitcoin’s value proposition has moved from being used in small, frequent transactions to being used as a de facto store of value. There are many reasons behind this paradigm shift for Bitcoin. One that you’ll commonly hear thrown around, especially if you talk to fans of alternative cryptocurrencies like Bitcoin Cash, is block size.

What is Block Size?

Most cryptocurrencies are built on a digital software or ledger (i.e., record book) called a blockchain. The inner workings of blockchains can be rather complex, but we’ll keep the discussion rather simple here. In order for a cryptocurrency transaction to be processed, it must be grouped together with other transactions into a “block”. The block of transactions is then linked together with the other blocks that came before it. This chain of blocks, or blockchain, effectively contains the record of your transaction and every other transaction that ever occurred using that cryptocurrency.

As we all know, financial transactions of any type contain certain information. Almost all transactions will contain information about the amount of money transferred, the date and time it was sent, and the people who sent or received it. If you transfer money on Venmo, the transaction might also contain your Venmo address and a user-generated description of why money was sent. If you use a credit card, the transaction will likely contain your credit card number and the merchant’s information. And if you use a blockchain, it will probably contain a reference to the previous block of transactions to determine block sequence and an identifier of the blockchain (i.e., software) version.

Data takes up space, whether it’s in the Cloud, on a computer, in a blockchain, or anywhere else. In the case of a blockchain, where a record of all transactions ever performed is maintained, data takes up A LOT of space. Block size is one of the main ways that the Bitcoin blockchain addresses the question of how much data to accept at a time. If we were to oversimplify, we could say that allowing larger blocks on the blockchain would generally allow more transactions to be processed at the same time, while allowing smaller blocks on the blockchain would generally allow fewer transactions to be processed at the same time. Since block size is a pretty big factor in determining the number of transactions for which Bitcoin can be used, you can imagine that there have been some heated discussions between Bitcoin users who see it as a store of value and Bitcoin users who see it as a replacement in day-to-day transactions.