The launch of Bitcoin in 2008 created a sensational wave in the financial market. James A. Donald was the first to comment and point out the problem of scalability. He said, “the way I understand your proposal, it does not seem to scale to the required size”. Now, Bitcoin is a decade old and yet the problem of scalability still prevails.
But what do we understand by scalability?
Scalability refers to the number of transactions that can be processed on a network per second. Since the beginning, Bitcoin can process only 7 transactions per second, which were good enough in the start but now posse a problem of scalability. With more interest and the increasing popularity of cryptocurrencies in the market, the system has become congested for the past few years. This has resulted in longer process time and higher transaction fees.
Bitcoin and consequently other cryptos were introduced with the aim to change and replace the existing payments system. Thus, there is always a comparison with existing global payment systems like Visa and Mastercard. Introduced in the 1990s, Visa and Paypal were the upgraded systems of payments in the financial world. Currently, Visa can process over 1700 transactions per second and Paypal can process over 150 transactions per second. When compared to Bitcoin’s 7 transactions, both seem like a magical number. In fact, when busy, Visa can process over 56,000 transactions in a second but for Bitcoin, users have to sometimes wait for days to process a transaction.
This is where Lightning Network comes into the picture.
What is Lightning Network and Who developed it?
Lightning Layer or LN is a second layer payment system that is added on top of blockchain to improve scalability. It is most compatible with Bitcoin and Litecoin. LN wad first described in a white paper in 2015 by Thaddeus Dryja and Joseph Poon. Currently, three teams are working dedicatedly on the Lightning Network with inputs from the Bitcoin Community. These are Lightning Labs, Blockstream and ACINQ.
Bitcoin and other altcoins are based on the decentralized network blockchain, which is the reason for considering cryptos for mainstream adoption. However, when it comes to speed and throughput, this cannot be achieved without compromising on the decentralized system.
Cryptocurrencies use blockchain technology that uses consensus as a means of verifying a transaction. The consensus is achieved by a group of decentralized networks of computers called nodes who approve and upload the transaction on a blockchain. Blockchains such as NEO and EOS use a lower number of nodes for validation and are faster than bitcoin. But for Bitcoin, its popularity has led to more nodes joining the network and hence the average speed of transaction goes down.
When we talk about Lightning Network, it provides an improved micropayment system build as an addition to the original blockchain, keeping it sufficiently decentralized. In simple words, LN adds another layer to Bitcoin’s blockchain that lets users create a payment channel between two parties to transact on this extra layer. This channel will remain for as long as required and acts as a direct link between the parties, making transactions almost instant. This also reduces the transaction fee to almost non-existent.
How does Lightning Network work?
Let’s learn how the Lightning Network works with an example.
Say Alex and Julia are a couple and often send Bitcoins to each other. Through regular channels, they incur fees on each transaction which also consumes a lot of time. But through Lightning Network, they can create a channel to transact Bitcoins with one another. First, they have to create a multi-signature wallet that can be accessed by both through their private keys. Next, they have to add say 5 BTCs each in their wallet and start transacting. If Alex sends 2 BTCs to Julia, the balance sheet will reflect Alex having 3 BTCs and Julia with 7 BTCs. For this, Julia needs to use her Private Key to transfer the ownership of 2 BTCs. If in another transaction, Julia sends 1 BTC to Alex the balance sheet will reflect the updated balance. However, this all remains on the Lightning Network layer only. The actual distribution of funds is updated on the original blockchain when this channel closes. So if the transfer from Julia to Alex was the last transaction, the blockchain will reflect Alex with 4 BTCs and Julia with 6 BTCs.
This means that only after the Lightning Channel closes, the initial and final transaction is reflected in the open blockchain network as a single transaction.
Where the Lightning Network will be used?
Once broadly accepted, the Lightning Network can utilize the previously created channels with people you know to process the transactions rather than creating a new one. The system will be able to find the shortest route for any transaction. This could provide the answer to the current scalability issue and allow Bitcoins to be used to buy a cup of coffee.
However, it is worth noting that this channel is creating as an extra layer on the blockchain and does not has its security. Therefore, the scope of the lightning network will mostly be limited to smaller transactions and the larger ones, requiring higher decentralized security would still take place on the original blockchain.
Concluding, it can be seen that Lightning Network has the potential to provide a solution to the scalability problem of Bitcoin and consequently other cryptos as well. It could prove beneficial for the long-haul based on the developments and advancements that happen in the near future and its acceptance by the community.
Meta Description: Lightning Network can be a solution for the Bitcoin (BTC) scalability problem. It can increase transaction speed and decrease the fees.
