SegWit paves the way for the Lightning Network

The SegWit soft fork was activated on the Bitcoin network. This is Bitcoin’s biggest upgrade to date, rearranging how data is stored in Bitcoin blocks. Nodes that upgraded will use a whole new data structure, while the nodes that didn’t upgrade will still continue to function normally.

Bitcoin blocks now have a weight limit instead of a size limit, which allows for blocks up to 4 megabytes. Additionally, SegWit also solves the malleability bug, that’s been a major problem for Bitcoin, but most importantly opens up the road for advanced protocols like the Lightning Network that are necessary to push Bitcoin into mainstream.

Lightning Network is a technology that leverages off-chain scaling. Its sets the stage for a decentralized option and extends Bitcoin with some nice properties for asset transfers.

The basic idea is to switch from a model where all transactions are stored on the blockchain, which creates a bottleneck, to a model where users can employ private payment channels to transfer value. Payment channels are a way to do secure Bitcoin payments, without broadcasting each transaction to the blockchain. The Lightning Network effectively improves upon this idea by creating a network of these payments on top of Bitcoin.

The Lightning Network allows for rapid payments, no third-party trust to control the transfer of funds between two entities, reduced blockchain load as transactions are not stored on the blockchain, additional multi-signature security and atomic cross-chain swaps.

One of the major benefits of the Lightning Network is cross-chain transactions, also known as atomic cross-chain transactions or atomic swaps, where users can trade different cryptocurrencies instantaneously, without risk. Payments can be routed across more than one blockchain, including altcoins. With Lightning transactions we’ll be able to stream money to pay anyone in the currency they want to be paid in, with whatever money we have in our digital wallet. For example, with atomic swaps a user would be able to pay a merchant in Bitcoin, even if they only had Litecoin, as long as both blockchains are using the Lightning Network.

On May 10, Segwit was activated on Litecoin, allowing Lightning Network transactions from various software clients to settle on the cryptocurrency’s network. The creator of Litecoin, Charlie Lee, described the two competing networks as two highways:

“Think of it being two highways: Today, Bitcoin is packed full of cars and Litecoin is empty. Even with Bitcoin packed, the cars are not coming to use the Litecoin highway today because it’s not connected and it’s inconvenient (centralized exchanges and slow on-chain transfers) to go across. LN will build bridges over the highways. But a side benefit is that these bridges will connect both highways together. Maybe the bridges on Bitcoin are enough such that cars will still stay on the Bitcoin highway. My bet is that the convenience and the cheaper tolls on Litecoin highway will convince cars to cross over and use Litecoin. But we won’t know until both are built.”

Including Litecoin, at least another six cryptocurrencies are running the SegWit upgrade, and most have tested Lightning transactions on their main network successfully: Groestlecoin, Syscoin, Digibyte, Viacoin, Vertcoin and NAV coin. All of these cryptocurrencies have seen price spikes, that many attribute to the Segwit integration.

In the future, there could be dozens or even hundreds of cryptocurrencies using the Lightning Network. Each network simply needs to implement SegWit on their blockchain. While not every cryptocurrency is compatible with SegWit, Lightning can make it possible to interconnect different blockchains, allowing smaller altcoins to benefit from the advantages of established cryptocurrencies.

The Lightning Network is still under development, and there are still several steps before before Lightning transactions are available on Bitcoin’s blockchain. When it ready, this technology has the potential to significantly improve scalability and privacy and help Bitcoin achieve mainstream adoption by individuals and institutional users.