Can the lightning network speed up bitcoin?

Development around the burgeoning Lightning Network has prompted me to look back and update an article I wrote last year, when Bitcoin Cash was first on the scene.

Bitcoin has a relatively small 1 MB block size limit; making its transaction capacity slower compared to the newer generation of cryptocurrencies. This means that bitcoin is capable of processing only seven transactions per second; which at the time of launch was more than enough to handle the network in its fledgling stages. Most bitcoin enthusiasts believe an increase in speed is important, if it is to work as a transaction currency.

The block limit size of the bitcoin blockchain can be considered a hindrance to bitcoin’s growth. However, the downside to increasing block limit size is the ability for smaller miners to help validate transactions. This can lead to the major miners centralizing the mining power and therefore creating influence.

The scaling of bitcoin has been a fiercely debated topic for quite a while now and the lightning network is considered a possible solution to enhancing the bitcoin transaction area. The lightning network is a level two network that interfaces with bitcoin to make transactions faster. It is therefore not a ‘fork’ of bitcoin.

What the lightning network is actively trying to solve is to allow transactions to occur outside of the blockchain using bitcoin scripting (smart contracts). This makes it possible to create a secure network of participants to transact with.

Allowing transactions to occur outside of the blockchain, enables participants to send each other micro transactions at high speed without the need for the transaction to be updated on the blockchain every single time. When both participants no longer need to transact with one another, only then will the blockchain update. This minimises verfication on the blockchain and transaction times. To connect everyone together, the lightning network uses already existing relationships to find others. This avoids going back into the blockchain (see below example).

The lightning network summarises it’s advantage as the following: (the lightning network) “is similar to how one makes many legal contracts with others, but one does not go to court every time a contract is made”. At the time of writing, there are a handful of Lightning wallets available however the technology is still in a fledgling state. There are numerous challenges to be solved if lightning adoption is the answer to bitcoins transaction woes.

Issues requiring attention:

1. The lightning network still requires fees. Although transacting ‘off-chain’ will help reduce block fees, nodes on the lightning network still require incentive and each channel takes a cut. There are actually two fees involved. The fee to open a channel between users, and a fee to send the transaction. How these fees will develop over time must be watched closely.
2. Adoption is the second issue. Cryptocurrency is still finding its place as a medium of exchange outside of investment purposes. Therefore gaining traction as a viable payment alternative has its challenges. Couple this with another technology layer on top of bitcoin and we can see that the general public may face confusion. Some of the newer wallets I have seen have really done a great job with their UI/UX so this is a positive. Furthermore there are some great businesses pushing adoption to mainstream audiences. I believe the lightning network has been a great catalyst for this push.
3. Stability, security and decentralisation of nodes is a hot topic. Bitcoin enthusiasts have concern over an external system managing transactions on top of a technology that was specifically designed to be completely decentralised. This may hurt its reputation and uptake by certain sections of the crypto community. How this is handled will be very important to the technology succeeding going forward.

I have noticed a lot of debate around adoption and speed of transactions in the cryptocurrency space throughout 2018. The lightning network has offered a valuable tool for developers to use as an interface point for point of sale transactions. I believe we must allow the natural development of this network to occur and judge the outcome when we see more adoption. The cryptocurrency sector is notoriously powerful at creating solutions to problems thought to be unsolvable in the past. I’m excited to see what other solutions that may be floated this year, but for now let’s see where our community can take the lightning network.

Thanks for reading. I manage a soon to be launched Digital Currency Exchange based in Australia. Check us out at www.easycrypto.com.au or if you are in New Zealand take a look at www.easycrypto.nz.