Bitcoin`s limitations

Of course, no system is perfect, and a decentralised, distributed system such as Bitcoin suffers from limitations that a centralised system doesn’t.

The main limitation is the trilemma between security, scalability, and decentralisation. This means that there are trade-offs when designing a network, and you can’t have all three. In other words, you can’t have your cake and eat it.

• Scalability is the capacity of the system to execute a higher volume of transactions 
• Security is the capacity to protect the ledger from cheating, hacks or other attacks 
• Decentralisation is the system redundancy; it’s what stops any one party from controlling the network

Fiat money, for example, is very scalable and reasonably secure. On the flip side, it’s completely centralised, and controlled by very few people.

Bitcoin, on the other hand, is designed to focus on decentralisation, and it’s incredibly secure. This comes at the price of scalability. Currently, Bitcoin’s maximum speed hovers at around five transactions per second (a fraction of Visa’s purported 50,000+), making it impractical for use at scale.

This explains why right now Bitcoin is popular as a Store of Value and less so as a Medium of Exchange. In the next lesson we’ll look at how that trilemma is being addressed so that Bitcoin and other cryptocurrencies an scale, without compromising on the characteristics of sound money.