"Bitcoin only does seven transactions per second, but Visa does 4000".
On the face of things, this seems like a reasonable statement, but it does fail to capture the nuance of either our current system of money, or how technology works.
Both of those are big points, but we’ll keep it light today.
Given we've learned that bitcoin is money on the internet and that lots of transactions happen on the internet, we might want to get to the bottom of this one.
You know, just to be sure that it’ll work.
So is it slow? It’s more steady than slow, but to understand this properly we’ll look at what exactly those 7 transactions a second do and what we can do to speed things up.
Part one: So what exactly does a bitcoin transaction do?
It’s a final settlement of debt.
This is important in our comparison with the current systems, as we don’t regularly settle our debts and most of our day-to-day transactions are actually based on extended credit.
Credit that never really settles, but just sort of gets netted out against accounts and rolled forwards.
For instance, Visa doesn’t really send MasterCard (or vice versa) a bag of gold at the end of the day to make sure everything’s square.
Instead you can net out most of the flows backwards and forwards with each other and then settle up any time the accounts require it, or you start to get scared the other party can’t pay.
There are many reasons why never settling debts creates moral hazard and other issues, but we won’t cover that today.
Instead I’ll just point out that, the trick Visa uses to make payments quickly is simply, to not make payments at all.
A visa payment is more equivalent to the merchant ringing up “your friend Visa” and asking if you’re good for it.
As no money needs to be moved right now the “payment” appears quick as it’s just an exchange of messages that promise future payment of debts.
Each of bitcoin’s “seven transactions” are more akin to the point when MasterCard and Visa get the books out, check who’s paid who and finally settle all this debt once an for all! This is, on average, seven times a second in bitcoin.
What’s more, it would be surprising if there were ever a moment in time when all debts between Visa, MasterCard or banks were ever fully settled, or even if two parties ever fully accounted and settled their books.
By comparison Bitcoin achieves this globally, by auditing the transactions and balance of every user of the network and confirming the correctness of every transaction to date (11 years so far) every ten minutes.
Compared to the competition it is a very, very efficient settlement network and system of record.
Part 2: Do we have any options to speed things up?
After all, it’s unlikely that we’d want Visa and MasterCard to settle their books globally every time somebody wanted a coffee.
The cheat answer here is to point out that everything Visa does on top of dollars you could do on top of bitcoin. It’s simply a form of deferred debt and can be achieved with many banking applications, wallets and exchanges.
It’s just not that popular in bitcoin, as we’d prefer to look at other ways to achieve this that require a little less trust in banks.
The most common way of achieving this currently is on top of the lightning network. This is an application which sits on top of bitcoin and allows people to swap messages, to confirm payments.
This is similar to visa, only these messages are not committing to debt, but instead creating new payments which will always settle with no risk of default. Like just handing over the cash.
What’s even better is that this is a peer-to-peer network, which scales in speed and efficiency of payments as more people use it. The only type of scaling that we should care about and much more important than transactions per second.
There’s not really a figure for how many transactions a second it can support (however it did just onboard the country of El Salvador), but it clears instantly, anywhere in the world without the use of credit.
Some would say that’s quite the achievement and something we can build on :)