In the 19th century, gold and silver coins were a common currency used as medium of exchange between individuals transacting directly between each other. Although paper money became a convenient way to carry and use as medium of exchange, gold and silver coins were given priority for their trust and safety. Equivalently, not all individuals trusted banks for storing their gold and silver. The combination of bank robberies and bank runs contributed in making individuals weary of storing all of their wealth at the same bank. Many rather preferred to implement a strategy of diversification by being the client of several banks and storing some of their wealth (gold and silver) themselves.
You might be wondering why I’m bringing this up. Well, I’d like you to keep this first paragraph in context while I share this proposal. One of the main issues frequently brought up about Bitcoin relates to scalability. Several concerns emerged regarding storage, bandwidth and capability to handle several thousands of transactions per second. In this regards, I’d like to propose an implementation that would address most of these concerns. But at the same time, this proposal comes at the cost of partially losing the benefit that comes with decentralization that Bitcoin inherently has. Do not worry, the proposal does not change Bitcoin itself.
So let me continue. Imagine a separate block chain (or ledger) handling a high number of transactions, being rapid and efficient but all at the cost of being semi-centralized. This separate ledger, still publicly available to anyone, would be maintained by a handful of companies such as Coinbase and BitPay that are currently already facilitating transactions between consumers and merchants. Currently, Coinbase aggregates its account in various bitcoin addresses, with no specific association between a given bitcoin address identified on the blockchain and their users’ account. When one Coinbase user sends a payment to another Coinbase user, Coinbase’s internal accounting handles this transaction without any involvement of the Bitcoin network. Equivalently, another company in the world might be doing the same thing. However, whereas such internal transactions are possible between users of the same custodian, any exchange between users of different custodians must be handled and recorded on Bitcoin’s blockchain, and subject to its scalability limitations.
Currently, Bitcoin has a certain limit on the size of each block, hence this translates to a limit on the number of transactions per block. With an approximate 1 block every 10 minutes, this imposes a hard limit on the number of transactions per given period. The Bitcoin protocol will be changed eventually to increase this value, and it is suspected that by that time, the Internet bandwidth and storage capacity will have also increased, thus allowing for such change. This subject was brought in a conversation with Satoshi Nakamoto. Until then, we have this limitation which does not impact Bitcoin users for the moment as there are only 3 to 7 transactions per second right now, well under the limit.
As of now, transactions between users of the same custodians are only limited by the capacity of the custodians, which can adapt to follow their customer’s need. But if there was a separate blockchain or ledger as I’m proposing here, that would allow a direct transfer between users of different custodians, without the current limitations of Bitcoin in transfer rate; we would have the capability to handle a high number of transactions. Suddenly, the amount of transactions that we could send per second could rival the amount processed by Visa and MasterCard.
Now, there are multiple ways this could be implemented, one of which would be the selection of 10 custodians that each turn, update this separate ledger for the next hour, or 24 hours, sort of like a temporary “master custodian” with a similar role as miners on the Bitcoin network. Custodians sending the bitcoins would collect the corresponding transaction fees, sending the transaction information to the Master custodians and to other custodians in their mesh network.
Addresses on this network would all begin with say the number 5 and be followed by a 5 letter keyword identifying each custodian. When say, 1.1 BTC is transferred from custodian “Alpha Storage Inc” with keyword ALPHA to custodian “Omega Bitbank Inc” with keyword OMEGA, the following transaction would be recorded:
5ALPHA2jfj38thf82759hsy2 1.1 BTC
A user of custodian Omega Bitbank would request from Omega Bitbank to generate an OL (Open Ledger) address which will start with “5OMEGA” and will then share it with the user of Alpha Storage for him to send the payment to.
In addition to this, an inventory listing of each bitcoin addresses held by each custodian will be available at all times and be provided by the respective custodians. Anonymity would still be preserved but we will have the added benefit of knowing precisely how many bitcoins are currently held by each custodian. For example, with Coinbase, right now we do not know which bitcoin addresses are under its control, which would not be the case with such implementation. Such implementation will render existing custodians to a more open form of accounting.
Finally, just as with banks today, every night they adjust their accounting by balancing their book with a wire transfer. During a given day, Alpha Storage may have sent a total of 202.44 BTC to OMEGA while Omega Bitbank might have sent 198.33 BTC in payments to Alpha Storage. As such, Alpha Storage would be sending the difference (4.11 BTC) on that night on the traditional Bitcoin network. This is an important requirement as customers of Omega Bitbank might not trust Alpha Storage (or vice versa). It does not have to be done every 24 hours, it could be more often, such as automatically every 6 hours.
In conclusion, just like people were transacting only in gold and silver coins, Bitcoin users who are still concerned about any custodians can stay in the existing Bitcoin network and exchange directly among themselves. At the same time, a great majority of users will be using custodians with a much more open system than we have currently with the traditional banking system. They will benefit with the rapid and high capacity of this custodian ledger network while still be able to benefit from the current Bitcoin network at their own will.
I look forward to reading your comments.