Lightning Network in 2019: Bitcoin’s Hope For Unlimited Scaling

Following Bitcoin’s collapse in 2018, many social media influencers switched gears, dismissing the notion of BTC as a viable medium of exchange. They are now heavily promoting Bitcoin as a store of value, first and foremost. 

Are they right, though? Not if we take a close look at the definition of money – what BTC strives to become.

For any asset to actually be used as money, it must fulfill three main conditions:

• It must allow a meaningful interpretation of prices, costs, and profits, thus be a unit of account.
• It must be a widespread medium of exchange – accepted in trading for a variety of goods and services.
• It must be a reliable store of value – it can be saved, retrieved, and exchanged at a later time.

What social media influencers don’t understand is that these three functions are closely correlated. If we take a single function away, then the asset can’t be used as money, anymore. Without the medium of exchange feature – the hope that one day, Bitcoin will become a worldwide currency, used by a large portion of the population – there is no value, whatsoever.

Luckily, the Bitcoin developers are aware of this problem and work around the clock to scale Bitcoin, so it can sustain a massive volume of transactions, at any moment, during any given day.

 

Bitcoin Scaling Explained

What does scaling means? It’s all about the blockchain’s ability to support traffic and process as many transactions as possible.

To put things into perspective, Bitcoin’s blockchain can process, on average, over 3 transactions per second, up to around 7 transactions per second. A mainstream payment processor like VISA confirms at a rate of 2,000 transactions per second, up to 56,000 transactions per second.

Why is Bitcoin at such a disadvantage? The inventor of the peer-to-peer electronic cash, Satoshi Nakamoto imposed a limit on every single block of transactions in the blockchain: the size of a block can be no more than 1 MB. Moreover, a block is created every 10 minutes, on average.

 

 

Nakamoto probably imposed those limits to prevent network spamming. He couldn’t have imagined such an exponential adoption, back in 2008. Yet, the adoption happened; the blockchain started experiencing difficulties, and the mempool (all the transactions waiting to be confirmed) increased day by day.

As a result, a battle of opinions emerged that soon transformed into an all-out political battle of control. On one side, all those involved wanted a block size increase to infinity, based on adoption, while on the other side, the voices saw Nakamoto as Moses and his 1 MB limit as an unbreakable Commandment in the Decalogue.

 

Segregated Witness (SegWit) Hard Fork Activated

In 2017, the battle peaked generating an unavoidable split.

On July 21, 2017, the Bitcoin miners opposed to a block size increase accepted a software upgrade, called Bitcoin Improvement Proposal (BIP) 91. This upgrade commonly known as Segregated Witness or SegWit introduced major changes in the data structure of the transaction block. These changes mitigated scalability, doubling the number of transactions any given block can store (it removed some of the data that had to do with signatures – “witness” information – and store or ‘segregated’ it outside the base block).

 

 

The change also helped solve an older problem Bitcoin had, called transaction ‘malleability.’ Transaction malleability prevented the development of any layers built atop of the blockchain that could help improve BTC overall.

Not everyone accepted the software upgrade. There were still some preferring the block size increase and on August 1, 2017, they split from the main network irreconcilably, creating Bitcoin Cash (BCH).  They also doubled the block size of the newly created coin to 2 MB.

 

Lightning Network: A Payment Processing Layer For Bitcoin

 

 

After the split, the Bitcoin Core (BTC) developers started working at implementing a payment-processing layer on top of the BTC blockchain.

The layer commonly known as the Lightning Network can eventually scale the number one cryptocurrency to VISA numbers, thus creating a truly worldwide currency.

The Lightning Network (LN) was made public to the world in 2016 when developers Joseph Poon and Thaddeus Dryja published their whitepaper.

In this whitepaper, the two presented a whole new network with its own specialized participants, that is inter-dependent to Bitcoin’s ‘main’ network and that helps BTC mitigating micro-transactions.

This network allows the creation of payment channels that basically act like micro-blockchains. To better understand the proposition, let’s use the Lightning Network in an example.

A bar starts accepting payments in Bitcoin and since there will be many transactions worth just thousands of satoshis, instead of broadcasting those transactions on the main blockchain – possibly clogging the network – the bar chooses to use the Lightning Network.

One client comes in and orders a few drinks. To pay, he opens up a bidirectional payment channel with the bar and sends the satoshis. This transaction isn’t actually broadcasted on the Bitcoin’s network, it is just recorded on the Lightning Network’s channel. A half an hour later, the same client orders some more and uses the same payment channel. Until the client leaves, he makes five more transactions. At the end of the night, he has a total of seven transactions recorded on the LN. Since the client left, the bar closes the channel and the seven transactions are aggregated into a single one. The aggregated transaction is broadcasted on the Bitcoin’s network and added into a block.

This is just one very simple example, but imagine if the bar could open a payment channel with all its clients, on a Saturday night, record hundreds if not thousands of transactions, and close that channel at the end of the night. Those hundreds (thousands) transactions will actually be a single one on the main blockchain.

 

Some Stats Behind The Lightning Network

Six months after the SegWit activation, in December 2017, the developers performed a series of interoperable transaction tests on the main blockchain. Roughly one month later, blockchain company Blockstream launched a payment processing system for retailers, with around 60 nodes operating.

Since then, the second layer has grown exponentially. As of today (February 15, 2019), there are almost 31,000 open channels operating on the LN that hold a total value of almost 700 BTC or $2.5 million, according to P2sh.info.

 

 

In terms of nodes, the stats vary depending on the source from over 3,000 according to Bitcoin Visuals, to over 6,000, according to 1ML.com.

 

 

Nevertheless, taking into consideration the most ‘pessimistic’ numbers, we still have a 50x increase over a one-year span.

With real mainstream adoption just around the corner, the Lightning Network could very well take Bitcoin to Promised Land and deliver on its medium of exchange promise. From that point on, the store of value proposition will be a self-fulfilling prophecy.

Welcome to the future, Bitcoiners.