Synopsis: The great scalability debate has split the Bitcoin community – literally – with the fork of Bitcoin Cash coming as a result. Those who have stuck with the original Bitcoin protocol hope that the Lightning Network will be the solution. Learn all about the Lightning Network and how it works.

The Bitcoin Scalability Problem

Bitcoin was initially envisaged as a cheaper & faster alternative to the traditional financial system. But in a pointed Bitcoin criticism, the world’s first cryptocurrency has lately become very slow and expensive. It has got to the point where transactions can take hours to confirm and the fees for a simple over-the-counter purchase can be higher than an international bank wire. The Lightning Network has been touted as a solution. But first, let’s better understand the problem.

The basic problem is that the original Bitcoin protocol broadcasts every transaction to the entire network. In addition, every full node on the cryptocurrency mining network must keep a copy of the entire history of the blockchain, stretching all the way back to Bitcoin’s inception in 2009. This file already takes up many gigabytes of memory space. Nakamoto’s implementation of shared ledger-keeping is very secure, but highly inefficient.

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Bitcoin has a 1 megabyte block size limit. This relatively small size keeps the blockchain history file from growing too much, but comes at a significant price – there’s only room for about 7 transactions per second. Compare that to thousands of transactions per second that a credit card company like VISA can handle. Due to the skyrocketing interest and demand for Bitcoin, there simply isn’t space within that 1 megabyte for everyone’s transactions anymore. It’s what has led to all the delays and the higher fees as competition heats up. This is why people say Bitcoin has a scalability problem.

The Lightning Network put the problem thusly in it’s white paper:

“If each node in the Bitcoin network must know about every single transaction that occurs globally, that may create a significant drag on the ability of the network to encompass all global financial transactions.”

One solution is to increase the block size. If a block size of 1 megabyte can support 7 transactions per second, then a block size of 8 megabytes could support 7 x 8 = 56 transactions per second. In August 2017, part of the Bitcoin community decided to do exactly this by splitting off in a cryptocurrency fork, creating Bitcoin Cash and immediately raising the block size to 8 megabytes.

Unfortunately, this approach makes each new block 8 times bigger, meaning it’s even more resource-intensive for a computer to run a full node. And to try to solve the problem purely through increasing the block size doesn’t scale either – you might need to raise it to several gigabytes per block to get close to what VISA handles. Part of the philosophy of Bitcoin is to encourage decentralization – so raising the barriers for small ‘hobby miners’ to participate in maintaining the blockchain is seen as highly undesirable by many in the Bitcoin community.

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It’s a conundrum which led some programmers to try to find a better way. Enter the Lightning Network, which some people see as the future of cryptocurrency.

lightning network

The Lightning Network As A Solution

The Lightning Network is a “second-layer protocol” built on top of a blockchain (most commonly Bitcoin, but it can be compatible with other crypto blockchains too) – a bit like the way the World Wide Web was built on top of the Internet.

The vision that the Lightning Network outlines is ambitious:

“The bitcoin protocol can encompass the global financial transaction volume in all electronic payment systems today, without a single custodial third party holding funds or requiring participants to have anything more than a computer using a broadband connection.”

Essentially, the Lightning Network handles transactions without going to the blockchain every time. The full nodes run smart contracts between each other, reducing the transaction times from minutes to milliseconds, and doing away with the 1 megabyte limit. With capacity essentially limitless, transaction fees should tend towards the marginal cost of providing the service – which might be comparable to the cost to a server of handling an email.

The ordinary payments that ordinary users are making are transformed into a series of IOUs. Eventually, the IOUs cancel each other out during the settlement phase – and just a few changes get written into the blockchain.

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The Lightning Network looks to get the transaction from the sender to receiver using the most efficient method possible. If any node drops out, the transaction can simply be re-routed a different way. The system still relies on distributed consensus and maintains trustless decentralization. If any node tries to act dishonestly, then they will not have transactions routed through them – and therefore will not get paid. It all gets executed at the same time.

Another advantage of the Lightning Network (as presently proposed) is that it hugely improves making cryptocurrency anonymous. It uses principles from the Tor network which obfuscates the pathway from sender to recipient.

Admittedly, it does get a bit complicated – this is quite advanced stuff. Thankfully, once implemented, users won’t really need to understand how the Lightning Network transmits their payment from A-to-B, just as 99% of people don’t know (or care) what’s going on in the background of a credit card transaction. All a Lightning Network user will see is a near-costless, instant transaction – which is, after all, what Bitcoin was always meant to be before it became a victim of its own success.

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