Explaining the Lightning Network and Bitcoin’s Scalability Problem

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  • Bitcoin has has a scaling problem for many years
  • Its recent rise has brough this back into the mainstream of crypto
  • How can the Lightning Network help alleviate this?

Bitcoin has a problem and it’s something we need to talk about. Recent headlines have been praising Bitcoin’s meteoric rise, but at the same time, those on the inside are pondering Bitcoin’s scalability problems. Countless solutions to this issue have been put forward – see the cancelled SegWit2x hard fork and the Bitcoin Cash hard fork – but whether these have done enough has been hotly debated. Today, we’re going to look at a potential solution that in the eyes of many carries the biggest amount of potential. Putting it simply, if you have any interest in Bitcoin, you need to make yourself aware – prior to a potential 2018 launch – of the Lightning Network and its importance.

Looking at the Problem

Blockchains aren’t exactly quick, but this is no secret. Peaking at approximately 10 transactions a second, with the average actually dropping much lower at around 3 transactions a second. Transaction fees are also at a premium, increasing by more than 6,000% since the start of 2017, which means that for small level transactions the fees can actually eclipse the amount of currency being sent.

Bitcoin’s current reputation is built upon the cryptocurrency being a strict investment product – in the same sense of gold – like a precious commodity. However, Bitcoin is going to need to do more if it has aspirations on becoming a functional day-to-day currency. Bitcoin Cash did address this problem to an extent, as it increased the block size from 1MB to 8MB, which boosted the transaction speed from a 3 per second average to an approximately 24 per second average. It has also driven down fees to match.

However, with bigger blocks – which are the nature of Bitcoin Cash – comes increased expense with regards to running a full node of the network. This in a way means that it may not be the answer to the scalability issue. Presenting another option is the Lightning Network…

The Lightning Network

Speed may have plagued Bitcoin in recent years, but what if it could process thousands (possibly even tens of thousands) of transactions per second? Well, this is what Bitcoin requires in order to be a viable medium of currency exchange, with the Lightning Network attempting to make this a reality.

Using the built-in smart contract functionality of the blockchain to conduct off-chain transactions across network participants. It may sound a touch complicated to those new to Bitcoin in general, so here’s an example.

Creating Bi-directional Payment Channels

You have two Bitcoin users, Person A and Person B, with both carrying out transactions between each other regularly. Through the Lightning Network, the transactions between the two would be recorded off the blockchain, creating a payment channel. With a payment channel open, Person A and Person B both deposit 1 BTC into the channel.

Following this deposit and several exchanges being carried out, Person A is left with 1.2 BTC and Person B is left with 0.8 BTC. Person A then decides to close the channel, so the latest balance is then fired back to the blockchain. The associated funds are then held for a period of time – expected to be 24 hours or less – while balance records are clarified. Following that, the transaction is fully processed and the funds are issued to both parties.

Tightening up Security

With the Lightning Network pulling transactions away from the blockchain, issues related to security have rightfully been raised. However, this isn’t as a big a concern as it needs to be. You see, the waiting period we mentioned above is of pivotal importance when it comes to security.

This is because in order to release funds, only the most recent balance sheet is applicable to process the transaction. Through this nobody can stake claim to a larger portion of the balance than they would be entitled to.

Adding to that, as it’s proven by cryptography, should someone choose to post an old balance sheet they would incur massive risk. Potentially voiding the balance, should this occur the other person has the waiting period to post the most recent balance sheet. Following this, the correct party would claim all the balance. What this is expected to do is incentivize the importance of honesty within the Lightning Network and tighten up all-round security.

Networking, Interlinking, and Scaling

As you may have already figured out, bi-directional payment channels don’t have the power to solve Bitcoin’s scalability issue – at least not alone anyway. But, the Lightning Network makes use of the term “network” for a reason. The whole purpose of the Lightning Network is to take the weight off the blockchain, by reducing the number of major of transactions that take place through it. How it does this is through multi-channel transactions, effectively spanning a network.

Looking back to the above example, Person A and Person C have an established payment channel, but now a transaction needs to occur between Person B and Person C, which can now be done through Person A as a result. It’s the process of interlinking (or networking) payment channels to ensure trusted and secure transactions.

With growing networks and unlimited “middlemen”, the Lightning Network can shift dependency away from the blockchain. Also, as the Lightning Network becomes more robust, it’ll become much easier to create channels and connect Bitcoin users.

Plenty of Potential

Bitcoin has to evolve, arguably to bringing it back to the cryptocurrency’s original selling point. This is the ability to send very small payments for an almost non-existent fee, as time has changed and BTC’s value has boomed, this has driven up costs and changed the face of the currency. What the Lightning Network presents is a possible solution, reducing the strain on the blockchain and potentially making Bitcoin a truly viable small-scale transaction currency once again.

Bitcoin’s Scalability Solution!

Money should be simple, as it should be easy to send money here, there, and everywhere at the push of a button. Bitcoin in its current state really doesn’t function in this fashion, as its low transactions per second (when compared to Visa’s 4,000 per second) make it somewhat ineffective.

The Lightning Network has the power to maintain Bitcoin’s trustless nature, while also bringing about faster speeds, lower fees, and the power to carry out both micro and nano transactions. Bitcoin still represents the future of currency and money exchange, with the Lightning Network having the potential to make that future a reality sooner rather than later.