What Does the Lightning Network Mean for Bitcoin?
Bitcoin has a problem. Hailed as the instant, fee-free currency of the future, it currently has major scalability issues that prevent it from fulfilling that promise. In this article, I’ll discuss the current problems with Bitcoin and how the Lightning Network could fix those problems and increase the usability of bitcoin.
Current Problems with Bitcoin
The problems with using bitcoin come from the system’s infrastructure. Every transaction made with bitcoin has to be verified and added to the blockchain before it becomes official. Transactions are verified by grouping transactions together into a “block,” and then miners convert that block into a complicated math puzzle, solve the block, and then add it to the blockchain.
The problem with this system is its scalability. Each block contains only one megabyte of data, and the system can only process seven transactions per second. The limited block space and slow verification time has created a bottleneck of backlogged transactions, so bitcoin users pay higher fees to incentivize miners to verify their transactions first. At time of writing, you’d have to pay around $14 in transaction fees whether you paid $1 or $1000 in your transaction. Because of this problem, it doesn’t make sense to use bitcoin to pay for small, day to day transactions. This has in turn caused some people not to adopt and leverage the currency.
While Bitcoin has a lot of potential as a peer to peer system for payments, it currently can’t compete with companies like Visa or PayPal, which can process tens of thousands of transactions per second.
Solution: the Lightning Network
Luckily, bitcoin enthusiasts haven’t given up on the currency so easily. For the past several years, the Bitcoin community has been working on something called the Lightning Network, which could solve Bitcoin’s scalability issues. Here’s how it works:
Instead of making transactions directly on the blockchain, two parties can open up a private channel between the two of them. They both contribute funds to the channel, and as long as the channel remains open, they can exchange currency back and forth. Once the channel closes, the final amounts between the two parties are recorded, and the totals are added to the blockchain.
Channels can remain open for hours, days, weeks, years, and even decades. That’s where the real power from the network comes into play. The Lightning Network can automatically route you though already-open networks so you can pay someone without having to open a bunch of private channels, and it’d be an instant, fee-free transaction.
What that Means for Bitcoin
The implications of the Lightning Network are potentially huge for bitcoin, as it would allow the coin to compete head to head with other platforms like Visa and PayPal, and be used in day-to-day transactions, such as buying clothes or food at the store or sending money from your phone. With the Lightning Network, bitcoin really could become the currency of the future.
Current Status of the Lightning Network
In just the past couple of weeks, the Lightning Network has made major progress from being a theory to becoming a reality. The software still has some major challenges, and engineers are still figuring out how to solve some double spending issues, but a couple of companies are already starting to use it. Blockstream opened an e-commerce site with a line of products that can only be bought through the Lightning Network, and in the beginning of January, TorGuard, a VPN provider, announced they’d accept payments made through the Lightning Network. While the Lightning Network still isn’t ready for wide-spread adoption, these promising developments suggest its arrival isn’t far away.
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