Unlocking The Crypto Puzzle — PART 6 - The Lightning Network — Bitcoin and the Impossible Dream

(Unlocking The Crypto Puzzle is an ongoing series of articles to help demystify cryptocurrency for everyone.)

Bitcoin Has a Problem

In the beginning, Satoshi created Bitcoin. And that’s where the problems started.

If you ask the average cryptocurrency enthusiast what the problem with Bitcoin is, they would probably mention the volatility in value. And while that has been dampened somewhat during the 2018 bear market, for many of us owning Bitcoin has been a bit like riding the world’s most insane roller coaster.

But that’s not Bitcoin’s biggest problem. The biggest problem is scalability. What do I mean by scalability? Simple… Bitcoin’s blockchain is slow. As in S………. L……… O………W. While it was a revolutionary concept to be applied to a peer to peer electronic cash system, the fact is that as a method of conducting payment, it is not designed to grow into a truly global high-volume transacting system.

Bitcoin’s blockchain creates a new block every 10 minutes and it has a maximum capacity of 1mb of data. Bitcoin averages around 7 transactions per second (TPS). This number has remained more or less unchanged over the years. And while it seemed fine during the early days, it has been an ongoing problem for a few years. What used to take 10 minutes to process (remember — 1 new block is created every 10 minutes) can now take over an hour. And if there is heavy Bitcoin traffic, such as was seen during the late 2017 surge, it sometimes could take almost a day to process an order.

Clearly a solution was needed. It was a lack of a clear answer that drove many of the hard forks from Bitcoin over the years. And yet, for all the talk, no one seemed to have a solid answer. Everybody knows there is a problem. There is no way Bitcoin could possibly scale to compete with the big boys… MasterCard and Visa (MC/V).

Now you may wonder why people think this is an issue. Simply put, Bitcoin was intended as a peer to peer electronic cash system. Something that could remove the middlemen — the banks and MC/V — from retail transactions. But Bitcoin takes 10 minutes to process a single block of 1MB. And while that can seem like a lot — at 7 TPS that’s about 4200 transactions every 10 minutes. MC/V processes, on average, about 24,000 TPS. And that’s the average. On a busy day that number can go much higher.

So how can Bitcoin hope to scale in a way that would allow it to process anywhere near the 86 million transactions per HOUR that MC/V do? Many people think the answer might be the Lightning Network.

What Is the Lightning Network?

In 2016, Joseph Poon and Thaddeus Dryja wrote a whitepaper, The Bitcoin Lightning Network. In this paper, they outlined a system that would sit on top of the Bitcoin Blockchain. The basic idea was that not every transaction would necessarily have to go through the blockchain. Instead, thousands of transactions could run outside of the blockchain without being instantly recorded into the next block. Then, when the two transacting parties were ready to settle accounts, they could close their outside loop and automatically “settle” their accounts by recording a total transaction into the blockchain.

Imagine that you and “The Store” would open up a line of purchase, let’s imagine it as a purse. You would do this by putting Bitcoin into the purse — we’ll say you put 1 BTC in the purse. It’s still your bitcoin, but its being held in trust by the Lightning Network. Now you can purchase anything you want and the transaction happens on the Lightning Network, but is NOT reported to the Bitcoin Blockchain… yet.

After a period of time, you have finished your shopping and are ready to settle your debt. For the purpose of our story, we’ll say you purchased 25 items and spent 0.3 BTC. Inside the Lightning Network, its ledger shows each purchase and that you have spent 0.3 BTC and have 0.7 BTC remaining. Upon closure of the Lightning Network wallet, the end transaction — you sending 0.3 BTC to “The Store” — would be recorded on the Bitcoin Blockchain. There would be no record of the 25 items purchased, just that an amount of Bitcoin was sent from one party to the other. The remaining funds would revert to your Bitcoin wallet as it was never spent.

This means that thousands of transactions per second could conceivably take place while riding on top of the Bitcoin Blockchain structure. However, it only opens up 2 transactions on the Blockchain itself — the opening of the purse and the closing of the purse.

Is This a Good Thing or a Bad Thing?

It depends on your view. Anything that might make the Bitcoin Blockchain operate smoother is a good thing. However, there are inherent issues inside this concept. Issues such as transaction costs, while they might be small in the Lightning Network, will still require a transaction cost on the Bitcoin Blockchain. And as we all know, those costs can be quite prohibitive at the moment.

In addition, back in 2016 when Lightning Network was conceived, Bitcoin wasn’t the “value asset” that it is thought of today. Most people in cryptocurrency don’t view Bitcoin as a tool for daily buying and selling of goods, mainly because of its price volatility. And if the majority of Bitcoin holders actually view the coin as an investment asset, then you might question if the Lightning Network is even necessary. Clearly, they have also considered this as they have expanded their scope and are developing the Lightning Network for a variety of different tokens.

Also, there are stablecoins and transactional coins now in the marketplace which have been created to specifically fill the void in day to day retail transactions. Ormeus’ OMC coin, a stabilized, asset-backed transactional coin with partnership on COTI’s state-of-the-art DAG structure and “Trustchain” algorithm, is positioned to revolutionize the market with its ability to handle tens of thousands of transactions per second at a low transaction cost.

When you combine all of these outstanding issues with the additional fact that a fully functional version of the Lightning Network does not exist, it creates an image of uncertainty. Unless the Lightning Network can overcome some sizeable hurdles quickly, it risks being left behind by systems better designed to fill the void. And as we seem to still be many months away from seeing a fully functional version of the Lightning Network (if at all), this might be a case of a good idea that didn’t quite become a great one.