One significant barrier to mass adoption of Bitcoin has been its scalability issue. Let’s explore how the Lightning Network attempts to address this problem.
The Bitcoin Scalability Issue
Bitcoin (BTC) was invented to facilitate instant and cheap peer-to-peer money transfers. However, ten years after it made its debut, the cryptocurrency is far from being used as a method of payment and is today looked at more as a store of value (often called digital gold).
A serious issue that has prevented Bitcoin from being used for payments has been its inability to handle a huge number of transactions simultaneously. To get an idea of the scale of the problem, Visa can process 50,000 transactions per second while the Bitcoin network can manage a mere 6-7.
In December 2017, as the number of transactions swelled up, the average transfer fee was over $30 and confirmation time reached over 30 minutes, as reported by Yahoo Finance. While the implementation of SegWit has resulted in lower fees and transaction times, the scaling issue remains to be addressed.
The Lightning Network is a solution that, experts claim, will address the issue.
Lightning Network 411
To understand the solution, one first needs to get to the root of the problem. Any payment on the Bitcoin blockchain is broadcast to the entire network and needs to be confirmed for it to go through.
The consensus is based on a proof-of-work algorithm where competing miners must solve a complex mathematical problem to validate the transaction. The miners place a higher priority on a transaction that is ready to pay a higher fee.
The Lightning Network solves this issue by creating an additional transactional layer consisting of payment channels. Two parties that wish to carry out multiple transactions between themselves can deposit a certain amount in a Lightning Network multi-sig wallet. Only the opening of the channel is recorded on the blockchain with the address of the multi-sig wallet.
Now, these entities can continue to send payments to each other as long as they wish. The details of these transactions are stored on the Lightning Network ledger and signed off by both parties. When any one of them wants to close the channel, the remaining funds are credited back to their respective wallets, and the closing transaction (with balances) is recorded onto the blockchain.
Impact on Bitcoin and Litecoin
Once implemented, Bitcoin throughput should increase considerably as well as having the transaction fees and transfers times drop. Users should be able to make micropayments like paying for a cup of coffee or a subway ticket.
However, the Lightning Network will have its own fee for opening and closing the payment channels. There will be no transaction fee initially, but that may change later.
Many altcoins will become redundant as they will no longer have a purpose to exist. Litecoin (LTC), which is a fork off of Bitcoin, was created as a faster and cheaper alternative. If BTC can address the scaling issue with the new solution, Litecoin would no longer be required to do the same work.
The founder of Litecoin, Charlie Lee, however, disagrees with this point of view and argues that LTC will always remain faster and cheaper than BTC and that the Lightning Network will facilitate its wider adoption. An interesting twist is that the Lightning Network could facilitate the easy exchange of BTC and LTC via “atomic swaps” as both coins use this solution.
While the developers of the solution are confident about the Lightning Network addressing the scalability issue, only once the community of miners, exchanges, merchants, and investors implement it, will the actual results be fully known.
Do you agree that Lightning Network will make Bitcoin usable as a method of payment? Let us know in the comments below.
Images courtesy of Shutterstock.
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