I know several people have chimed in and said that it is the block size that is limiting the transactions per second, but that doesn't make sense to me, I don't see, nor understand, what block size has to do with transactions per second...
A block can hold no more than 1 MB of transactions. This sets the network's transaction speed limit.
A block is generated once every 10 minutes on average. We can calculate the block chain's write speed with:
w = s * g
where w is write speed MB/hour, s is block size limit in megabytes (1 MB/block), and g is the rate of block generation per hour (6 blocks/hour).
Plugging in the value yields:
w = 1 MB/block * 6 blocks/hour = 6 MB/hour
Converting to bytes/second, that's:
6 MB/hour * (1 hour/60 minutes) * (1 minute/60 seconds) * (1,000,000 bytes/1 MB) = 1,700 bytes/second
In other words, think of the blockchain as a hard drive. We can write to this hard drive at a rate of 1,700 bytes/second.
Even if we develop faster computers, we can't write data faster than this because the network rejects any block larger than 1 MB. We need to make some allowances for SegWit, but for now, let's keep things simple.
A one-input, one-output Alice-Pays-Bob transaction requires ~ 200 bytes. This is the absolute best case. We can, therefore, obtain an upper bound on the transaction rate using:
v = w / z
where v is the maximum transaction volume, w is the write speed calculated above (1,700 bytes/second), and z is the average size of a transaction (200 bytes/transaction).
Plugging in the numbers:
v = 1,700 bytes/second * (1 transaction / 200 bytes) = 8 transactions/second
The answer to my question should be something like verification of sufficient funds per transaction input address takes 0.1 seconds, or as a whole verification of each transaction takes 0.3 seconds.
The network might appear to have a limit based on hardware or validation, but it does not. At least not directly.
As to why we should limit the block chain's write speed in the first place, the answer has to do with network security. Increasing write speed means:
- data flows through the network at a higher rate;
- more data must be stored by every node;
- more transactions must be validated by every node.
Every node sends and receives every block, and every block must be stored. Increasing the blockchain write speed means that every node pays the price. Some won't be able to keep up, regardless of write speed.
Transaction validation is a resource hog due to signature validation and UTXO set manipulation. Storage space and bandwidth are also considerations, but less resource-intensive than validation.
Now, if you're asking why we have a 1 MB limit given XXX computer has such-and-such technical capabilities, that's the realm of the Never Ending Debate. Calculations have been done and simulations have been reported. They are not hard to find. They are, however, hard to believe given their wildly-differing claims and underlying assumptions.
The best thing I can recommend is to download a copy of Bitcoin Core 0.16.0 and try syncing a node from scratch. Report back when you're done.
The write speed limit we see is a compromise between inclusivity (more people using bitcoin) and security (difficulty of double-spending attacks). The limit may not have been set correctly, but figuring out where (or even how) to set it is exceedingly difficult. Not because of lack of ideas, but because of too many and lack of widely-accepted selection criteria.
