There have been many arguments against Bitcoin since its inception, but probably the most relevant one today is that of scalability.
The truth is, Bitcoin is slow and expensive in its current form. The ability of Bitcoin to scale is simply non-existent during high volume periods. If you were active during the 2017 bull run, you will remember the monstrous fees being charged as the network clogged up with transactions. At some points, it was costing over $10 for a simple transfer.
This was also one of the drivers of the Bitcoin Cash fork, as enough people saw the need to increase the block size to warrant the creation of an entirely new Bitcoin.
Since then, scalability has continued to be a sticking point against mainstream Bitcoin adoption.
Luckily, solutions are being developed, one of the most promising being that of the Lightning Network.
What is the Lightning Network?
To understand the Lightning Network, it helps first to understand how Bitcoin works – read this post if you haven’t already.
When a transaction is made on Bitcoin, it is written into a permanent record of transactions known as a block. All these blocks are confirmed in a permanent ledger and linked to each other sequentially, which is where the term blockchain comes from.
This blockchain serves as a permanent ledger of all transactions ever made on the Bitcoin network. It is the maintenance of this ledger that leads to many of Bitcoin’s scaling problems. Even a transfer of $1 needs to be written into the chain, just the same way a $10 million transaction does.
The Lightning Network was proposed with the following idea: What if every transaction didn’t need to be recorded on chain?
Let’s say John lends Fred $10. Fred takes that $10 and buys something, and returns the $5 in change to John. The next day he gives John the other $5.
Just in the scope of that story, there are three transactions, all of which are rather insignificant. However, with Bitcoin each of those transactions would need to be processed by miners, included in a batch and written to the chain. Then those transactions would need to be stored forever.
Seems a bit overkill, doesn’t it?
What the Lightning Network proposes is a way to conduct these small transactions off chain or in a “sidechain”, leaving the main blockchain for larger, more significant transactions.
Moving transactions to Lightning
In the above scenario with Fred and John, it would instead work like this:
Both John and Fred set up a multi-signature wallet, which can be accessed by both of them. This is going to be their channel on the Lightning Network. Then they deposit a nominal amount, say 3 BTC.
You can almost think of this as a joint bank account, but with a sub account for each of them.
Once this channel is set up, John and Fred can now send unlimited amounts of transactions between each other, using their respective private keys. All these transaction are simply recorded within the wallet. The only things recorded on the Bitcoin blockchain are the initial deposits of 3 BTC each.
At any time, they are able to close the wallet. When this happens, the new balances are written to the blockchain, and the BTC is deposited back into their original addresses. Even if a million transactions happened between them, only two transactions (the initial deposit and the withdrawal) need to be recorded on chain.
Therefore, technically an unlimited amount of transactions can happen securely, without clogging up the network.
More users, more Lightning
The end goal is for the Lightning Network to be widely adopted enough that dedicated channels like Fred and John’s won’t even be necessary.
Instead, there will be enough Lightning channels open that you can simply send Lightning payments through your existing channels. The Lightning Network will automatically connect you via the shortest route, using your existing connections.
This is a classic case of “more the merrier”, similar to Bitcoin itself in its early days.
Obviously operating on a sidechain means the channels are less secure. For this reason the Lightning Network is being pushed as a vehicle for day-to-day transactions, such as buying gas and meals.
In reality it is these transactions that clog up the network anyway. By taking smaller transactions off chain, it allows the network to reserve its capacity for larger scale transactions that require the security of the full Bitcoin network.
Buying a coffee? Use your lightning wallet. Buying a house? Use your main Bitcoin wallet. Two separate channels for two separate use cases.
Who’s building it?
The Lightning Network whitepaper was written by blockchain developer Joseph Poon, who is also the brains behind Plasma and part of the OmiseGo team.
The whitepaper can be found here.
Nowadays, Lightning Network development is being carried out by three core teams; they are Blockstream, Lightning Labs and ACINQ. All three implementations have already been used and shown to be interoperable.
Other developments are also being carried out by other teams. The full list can be found here on Github.
As you can imagine, building a project of this scale is complicated and it is still far away from being fully adopted by the community. However, new wallets and clients are being worked on daily and more nodes are popping up every day. It seems like only a matter of time before it’s a standard part of the Bitcoin ecosystem.
What if it works?
If the Lightning Network vision is able to be fully implemented, it could transform the entire use-case of Bitcoin.
Currently Bitcoin has been seen more as a store of value rather than a peer-to-peer cash system, mostly because of scalability and cost issues.
However, the Lightning Network could see it return to a possible everyday cash option as was envisioned in the original Bitcoin whitepaper. While technically not peer-to-peer, it is still private enough to be considered similar to cash. Here are the key differences it will bring:
Transaction speed: The transaction will be almost instantaneous, as no block confirmations will be required. This will put Bitcoin’s TPS at the same level (or even higher) than Visa and Mastercard.
Transaction fees: As transactions are occurring withing the same “wallet”, fees will be miniscule, if they exist at all. This will finally allow merchants such as restaurants and stores to accept Bitcoin.
Scalability: Scaling issues on Bitcoin will become a non-issue, as everything is now happening off chain. Millions of transactions per second are possible in theory if the Lightning Network reaches mass adoption.
Atomic Swaps: One additional functionality the Lightning Network could provide is atomic swaps, which is when one cryptocurrency is instantly swapped for another (such as swapping Bitcoin for Litecoin). As long as they share the same cryptographic hash, coins could be swapped instantly between chains. This is still in development but has already been achieved in testing.
Anonymity: Because Lightning transactions happen off chain, there will be no record of them. This greatly improves the anonymity of Bitcoin.