Bitcoin’s Quadratic Hashing Problem

There have been many debates around why Bitcoin needs to scale, and, why transaction lags happen. One of the most common reasons attributed to transaction lags is the size limit of 1MB  per block of data, that has been hard coded into the Bitcoin core source code.

Quadratic Hashing

Each block in the Blockchain contains a hash of all transactions since the previous block was created.  This artificial size of 1MB limits the number of transactions that can get into each new block. If a transaction cannot be mined in a particular block, then it will have to wait till the next block is created to be mined. Many exchanges, and, service providers such as ATMs or money exchangers wait for up to 6 blocks after the initial validation to make sure that the transaction was indeed validated.

For the crypto-enthusiasts – and those interested in the details, the following link gives you a technical description of what happens when users have multiple signatures and when 1 MB is insufficient in size for miners to incorporate all new transactions since the previous block. This problem otherwise known as quadratic hashing – indicates that the time complexity to validate new transactions increases quadratically (i.e. by the power off) with respect to the number of signatures needed to hash each transaction.

Solutions to Quadratic Hashing

Bitcoin Cash

Many solutions have been suggested including in the link above. Bitcoin cash also proposes a solution wherein they increase the block size significantly (8 times, from 1 MB to 8 MB), which they claim is sufficient to prevent transaction delays in mining new blocks.

Current Block Mining Time and Segwit2X


The following link provides a list of the average time taken to mine a new block. on the main blockchain. As of this writing, the average time to mine a new block is about 15 minutes (Meaning every hour 4 blocks are mined on the network.). Imagine the delay if you were to either sell or buy anything on the internet using Bitcoin. Segwit2X is the solution that most ecosystem participants have agreed to roll out soon. Once the rollout of Segwit2X  happens, we will see a significant reduction in transaction time across the bitcoin network. The countdown to Segwit2X is listed here.



This week, Bitcoin forks. About 99% of the network including the miners, exchanges, user nodes will continue to support the original BTC, which has agreed to roll in the Segwit2X patch for scaling. However, many of these exchanges have taken a stand that they will not support the BCC chain.

Bitcoin Cash

However, the rest will move onto BCC (Bitcoin Cash), an alternative currency supported by a few miners, and, developers. ( Read more about BCC at its website ) There are quite a few main exchanges like Kraken that are neutral to BCC.

This has happened earlier with Ethereum – wherein two coins were born i.e. ETH and ETC, after the DAO hack. ETC continues to trade on several exchanges such as on, but major exchanges do not support ETC.

In equity markets, when a stock splits or additional shares are issued as a bonus, the value of the equity does go down to reflect this – so as to retain the market cap of the firm issuing shares. Usually, in the short term, this increases the market cap because of each new share, becomes more amenable to the buyer’s “willingness to pay”.

In Contrast, with respect to Bitcoin – this is very unlike a stock split (or a bonus declaration). This is the creation, of a brand new coin and blockchain off the original chain. Ideally, every BTC owner can- after August 1st access both his BTC and BCC balance. The futures market of BCC, already shows the price of BCC to be between 0.08 and 0.01 BTC.

The Crypto-valuation roller coaster

New Domain announcement: The past 2 weeks for me were a vacation from posting, before I launched my blog My old domain is and will resume posts on purely academic work e.g. big data analysis, commentaries on my own research, math models, and course teaching activities.

Crypto-valuation roller coaster

In the past two weeks though we’ve seen an amazing amount of bad press, and pretty bad speculations about everything crypto currencies. A lot of hype around Bitcoin’s scalability approaches too followed i.e. Segwit, Segwit2X, Bitcoin-Unlimited. Consensus 2017 was the meet up wherein the entire ecosystem (i.e. miners, developers, and exchanges) worked hard to arrive at an agreement to back Segwit. Over time though in 4 months wedges developed amongst the miners and othe development community that led to an assumption about a Bitcoin hard-fork and the birth of 2 coins on August 1st, and a prolonged battle amongst exchanges for who would own the BTC symbol. As of date, though, there is a beautiful agreement that will roll forward as a compromise called Segwit2X that will accomplish a doubling of block-size to 2MB and an optimization of storage networks will take shape. As of NOW (8:29 am) at least 55% of the network has already migrated to Segwit2X. has an amazing visual about this real-time transition to segwit2x.  The market tanked about 40% in the past two weeks to recover 20% after the announcement that consensus around Segwit2X is a given and a split if at all happens will survive the larger market.

This market is proving to be information efficient. As sentiments shift (bad press coverage to good press coverage), backed by developer action (arriving at a consensus around Segwit2X  to no consensus) and engineering enhancements (Ethereum scaling) we see the shift in prices. The roller coaster in price movements is captured by the shift in sentiments amongst the crypto-ecosystem participants.

What we’ll see after migration to Segwit2X?

  1. Transactions will become significantly faster on the Bitcoin network. Block validation times (that today) translates to 40 minutes sometimes will reduce to a few minutes (if not seconds).
  2. Similarly, transaction confirmation times (that need at least 6 blocks validated) will take much shorter.
  3. This will make buying, selling, and trading with Bitcoin more common and we will see in the short term people using Bitcoin as money – till the 2MB size limit is hit.
  4. In the long term, however, Bitcoin – the main asset through which all other crypto currencies flow will see a huge upside.

In addition what we’re seeing is a large number of Global Initial coin offers. All kinds of ideas from prediction markets to sports analytics coins are being released and promoted. Even Daimler the parent company of the Mercedes Benz released a 100 million Euro bond modeled on Ethereum!!

Unsung – an App Hacking Hunger with Blockchain

I saw this app called Unsung – which is an awesome application using digital currencies for payments. Distributed – live streamed – sharing of food to the needy people in one’s community.

Unsung brings together  donors and recievers of food/groceries,  using real time streaming similar to uber. The donors and the deliverers i.e. drivers who courier the food to the needy, can earn donations using digital currencies, thus reducing transaction costs. One can also donate on the platform using cryptocurrencies or cards. Eventually, I’m sure they will generate their own colored coins, which will replace the existing reputation points based model. These colored coins can then be traded on Karma markets.

Its fascinating what can be accomplished using micropayment using digital currencies and a mobile application.

Gold vs. Bitcoin as a currency hedge

Gold has been used as a hedge for portfolio diversification in many countries. For example, these 3 firms in Kerala – India seem to make gold in any form fungible. Over a period of time they seem to have amassed more of the yellow metal than some of the world’s richest countries in their reserves. 

What makes this equally interesting is that since the past 2 years gold hast depreciated as an asset – globally.

 Bitcoin on the other hand has significantly appreciated in value during the same period.  However,  with bitcoin, fungibility has been a concern due to very few people exchanging bitcoin for real money. The ATM’s charge an average of 20% commissions and the buy/sell ratio for Bitcoin is about 20%. Moreover, financial instruments such as loans on NPV for bitcoin haven’t yet made their mark.

But my guess is this will happen – sooner than later, since storage and transportation of bitcoin is much less expensive than Gold. The storage cost component of the transaction cost of holding Bitcoin is almost Zero, and this makes it very attractive.

Sooner, than later this will become an alternative if not powerful hedge against government backed currencies.

Look at the 2  graphs for these two forms of fungible currencies.