Currently, Bitcoin is experiencing this particular situation: slow and expensive transactions.
Transaction slowness is simply related on the decision to validate a new block by taking about 10 minutes. Therefore, a transaction, which must be inserted in a block to be correctly recorded in the blockchain, usually takes about 10 minutes on average to be inserted in the block and validated.
Furthermore, it is not convenient to consider a transaction fully confirmed as soon as the block in which it is inserted is validated, but it is advisable to wait until at least some other block is confirmed, for security reasons. Therefore, we generally have to wait at least 10 minutes to consider it valid, but it can pass even more than half an hour before it can have other confirmations and so, be considered completely confirmed.
It is clear that in this way Bitcoin transactions results too slow, especially if compared with fiat payment circuits such as Visa.
In addition, maximum block size is 1 MB, which means that max of about 2,000 transactions can be inserted within it, or just a little more.
2,000 transactions made every 10 minutes are really few numbers, and it often happens that transactions carried out on Bitcoin network all over the world are so many that some risk being excluded from the blocks, without be validated.
For this reason, Bitcoin network introduced fees which are transaction commitment costs used to convince miners to validate those blocks with their transaction before than other blocks which are in queue.
These fees tend to be particularly expensive when there are many transactions in the queue. In some moments it took $ 20 of fee to convince miners to insert a transaction in the first block to be validated!
This situation made Bitcoin up to now, not really scalable. That is, without an additional solution, it was impossible that it could spread as a means of common payment.
But the solution is there, it’s already operational, and it’s called Lightning Network (LN).
In order to avoid blockchain slowness due to its small block size, Lightning Network allows user to perform off-chain operations, i.e. transactions that don’t need to be validated by inserting them in a block.
It allows the creation of temporary channels, within which it is possible to make one-to-one direct transactions among the wallets that are able to use them. For each channel, only two transactions are required to be recorded on the blockchain: the one for opening the channel, and the closing one.
All other transactions that are carried out within the channel, after opening and before closing, aren’t recorded on the blockchain, but only within the off-chain. This means that they are immediate and fees significantly reduced.
Therefore, after opening a Ligthning Network chain, it is possible perform as many transactions as you want within it, without any costs, and with immediate execution. This is the future of Bitcoin!
All off-chains have a deadline, or once opened they must then be closed. However, at the time of expiry, the closure can be postponed, so as to be able to keep the channel open by setting a new deadline, and so on.
The great thing about LN is that all the chainnels are connected. In other words, they are all part of the Lightning network so, once only a single channel is opened, through this you can get to send or receive BTC, to or from, any other channel, without the need to open new ones. In other words, once you open your chain, you can send or receive BTC immediately, with less cost from any other wallet that currently has an active Lightning Network chain.
This innovation is already active, although for now it is still considered only in the testing phase, but probably by the end of 2018 it will be spread all over the world. The problem, if we want, is that the current wallets are not compatible. In other words, in order to be able to open a LN chain, a wallet must integrate an additional function that is not present on traditional wallets. Therefore, in order to use this new technology, you must update your wallets to new versions that integrate it.
To date, for example, Bitcoin wallet Electrum which is probably the most widely used in the world, doesn’t integrate this additional feature yet, so you cannot use it to create your own Lightning Network chain. Probably, new version that implements it will be released as soon as possible.
Once LN has spread, the number of transactions that can be managed will increase a lot, and the costs will drop a lot. It is probably for this reason that the major international payment circuits in fiat currencies seem to be worried about the possible success of Bitcoin, because immediate transactions and practically without additional costs, could make their technology obsolete and no longer convenient.