Bitcoin has seen some impressive growth in the latter half of 2017, but all that growth hasn’t been without growing pains. Due to the nature of blockchain tech, the network that underlies bitcoin will never handle transactions with the rapidity of a centralized authority like Visa. Currently the bitcoin network can only handle about 4 transactions per second at maximum capacity, which is unacceptably slow if it’s ever to be used as a global payment system.
Bitcoin Cash, a fork of bitcoin, attempted to solve this issue by increasing the maximum block size, but doing so is akin to putting out a fire by throwing larger logs on it. The competition to get transactions processed has led to the creation of an artificial “fee market”, where those who can pay higher premiums on their transactions are able to get them processed faster. The average bitcoin transaction fee is now over $40, painfully high for anyone who actually wants to use bitcoin to buy things. For a permanent solution, second layer “off-chain” solutions are required. Enter the Lightning Network.
If the Lightning Network launches successfully, it could transform bitcoin from digital gold into useful currency, enabling cross-border payments to happen in record time. The Lightning Network works by enabling the creation of bi-directional payment “channels” between two parties. The channel functions as an off-chain agreement between the parties on the state of their respective balances. To update the state of the balance, both parties must sign and time-stamp a new transaction. At any time, the state of the channel can be broadcast to the network by either party, which cements the balances permanently in the blockchain.
However, broadcasting to the blockchain only needs to be done in the case of a disagreement, where the blockchain effectively functions as a courtroom. Each party may submit their “evidence” (signed transactions), and the evidence with the most recent timestamp wins. With this setup, a network of channels can be created that allow any two people connected by the network to transact, and only take their transactions to the blockchain in case of a disagreement. For those interested in the nitty-gritty, the lightning network whitepaper can be found here.
Get more crypto/blockchain analysis by following our @bespokecrypto Twitter feed.