Lightning Network: Scalability Solution for Bitcoin

Lightning Network could solve the scalability issues in the Bitcoin backlog

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As at 4:00am GMT on 13th November 2017, the website indicates more than 141,000 pending transactions in the Bitcoin backlog. These unconfirmed transactions and their fees keep on increasing constantly. This report comes immediately after the management of the scaling solution SegWit2x declared that no action will be taken to make the block size of Bitcoin, twice as of its current size. The reason was the lack of general agreement for proceeding with that solution, as large block sizes were not the way forward. The Lightning Network is the solution to this scalability problem. Lightning network will have one channel dedicated for Bitcoin blockchain on every peer.

The lightning network can scale freely and the costs are low. The bitcoin value faces a reduction as the network traffic increases due to high volume of pending transactions. Now some transactions wait hours for confirmation in the bitcoin network.

Scalability issue in the Bitcoin network

The maximum size of a Bitcoin block is 1MB. This remains constant, but the number of transactions keep on increasing at a fast pace. This creates a bottleneck for transactions in the bitcoin network.

The transaction data are stored on the blockchain slower in comparison to the amount of transactions done by users. This creates a backlog over time with pending transactions piling up. You need to pay a high fee if you want to push the transactions to be confirmed at a faster pace.

Understanding the Lightning network

The lightning network will set up a smart contract script. This will create private payment channels on each peer dealing with transactions on the Bitcoin network. Additionally, another channel will be open on each peer to the Bitcoin blockchain.

There will be peer to peer transactions through private channels. The result of the chain of transactions will be the only transaction sent to the Bitcoin blockchain. This will make transactions more efficient and capable of scaling freely at a low cost. “Litecoin network” is a software pilot project that is trying out the lightning network.

Setting up the base

Enabling the Segregated Witness (SegWit) code to split the signatures from transaction data was the first step on this path. This allowed to free up storage in a transaction block. Bitcoin network can perform four times faster using the SegWit implementation.

The Segwit’s plan to introduce SegWit2x got postponed due to inadequate support from the platform. The initial plan was to set the block size to 2MB by 8th of November 2017. The programmers and Bitcoin community stood up against the decision of increasing the block size to 2MB.

Specialty of the Lightning Network

The signature verification occurs concurrently with each transaction on the network. The private payment channels have multi-sig security and time locks that make process transactions instantly. This will eliminate the long waiting time to approve transactions.

Since the Bitcoin blockchain will only have the outcome result from the private channels, bitcoin mining will have less transactions to process. This means the Bitcoin blockchain will not record sub transactions in the blockchain platform. Ultimately, this improves the data usage on the network providing efficiency to the whole process.

The lightning network can scale freely at a low cost. This allows users eliminate transaction fees for third parties, auditing fees, transportation fees and all other intermediary costs. There will be direct transactions between the two parties doing business without any intermediary involvement.

Existing scaling issues

There are still scalability issues prevailing in the bitcoin blockchain. The value of Bitcoin decreased and the value of Bitcoin cash increased recently. In Bitcoin Cash, the block size is 8MB without any limitation like in SegWit. Users who want to use larger blocks are already using Bitcoin Cash.

Other bitcoin alternatives are working on scalability solutions too. Ethereum is using the Raiden Network, somewhat similar to Lightning network. Dash cryptocurrency is trying out larger blocks of size 2MB for on-chain scaling. Scalability will be a key factor determining the best digital currency in future.

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