The Inherent Issues of Bitcoin and Proof-of-Work Transactions
In Satoshi Nakomoto’s original whitepaper for Bitcoin, his vision was to create a viable peer to peer electronic cash system. With the creation of Bitcoin and the subsequent creation of tokens and coins rom a variety of different developers and projects we are still stuck attempting to achieve universal acceptance of a digital asset which sits outside the confines of intervention and oversight.
Right now, Bitcoin is King. It acts as the cheerleader for not only the world of Cryptocurrency but for Blockchain technology as well. Bitcoin maintains anywhere from 40–45% market dominance and is the most widely accepted cryptocurrency by means of B2C (business to customer) transactions, globally. Logic dictates that it stands to have the greatest chance of realizing Satoshi’s original vision, however like all good businesses — it falls victim to scalability.
When an individual sends Bitcoin, this is referred to as a transaction. Due to the nature of the technology all transactions must be validated by a network of validators known as miners. The reason why these miners are so integral to the validation of the transaction is the core principle of the technology itself (decentralized ledger). The incentivization of these miners to validate the transaction is paid out by a transaction fees which is a fee tacked on to each transaction. Miners fulfill this task through incentivization. Without miner incentivization the network would cease to move forward and all transactions would grind to a halt. Miners choose which transaction to validate in order of the size of the fee associated with the transaction. The greater the fee, the sooner the miner will validate the transaction. When we multiply this event by hundreds of thousands of transactions occurring concurrently, fees get very expensive — very quickly.
Transaction speeds also fall victim to scalability issues as the nature of the technology requires multiple confirmations of each transaction from a variety of nodes to ensure that each transaction is valid. When there is a massive influx of transactions, the speed of the transaction suffers as it has to wait in line for superseding transactions to reach multiple confirmations across the entire network.
With these two factors, core developers had to come up with a solution for scalability and usability. Without implementing improvements to the existing Bitcoin core network, scalability would be not only an inhibitor, but a deterrent to its mass adoption. The Lightning network was developed to solve both the speed, fee and scalability issues.
Lightning network aims to create a second layer or “off-chain” payment protocol on top of the Bitcoin Core blockchain. The Lightning network allows payments to transact instantaneously, between two entities off the blockchain all while still securing the decentralized nature of the blockchain and improving transactions speeds (all while lowering transaction costs). All in all, it uses multiple concepts of decentralized technology to ensure the longevity and usability of Bitcoin, prepping it for mass adoption.