At the end of 2017, bitcoin reached its limits. The network couldn’t cope with the immense amount of transactions that were being sent on a daily basis. That’s why bitcoin isn’t ready to be used as a worldwide payment method yet; the scalability problem.
One of the solutions for this problem is the Lightning Network. With the Lightning Network it’s possible to send transactions lightning fast without delays on the blockchain. How that works, we will explain in this article.
An off-chain solution to the scalability problem
The Lightning Network is a so-called off-chain solution. This means that the transactions that are done on this network aren’t done on the blockchain itself. Instead, the transactions take place in a second layer that’s on top of the blockchain.
This solution has been created to enhance the number of bitcoin transaction that can be done per second. The current blockchain (without the Lightning Network) is able to process seven transactions per second. In comparison: the Visa payment protocol is able to process 24,000 transactions per second.
Adding new transactions to the blockchain also costs a lot of energy and computing power. This processing of transactions is done by mining bitcoin. In addition to the blockchain not having the capacity to handle more transactions, it takes up a lot of energy if every single transaction appears on the blockchain.
That’s where the Lightning Network comes in.
How does the Lightning Network function?
You could see the Lightning Network as an extra transaction network, existing on top of the bitcoin network. Transactions on the Lightning Network therefore do not appear on the bitcoin blockchain. Below you can read how this works.
From blockchain to Lightning Network
In order to use the Lightning Network, you will need to send bitcoins to the Lightning Network. You can do this by downloading a Lightning wallet. After that, you send bitcoin to this wallet. This transaction is just a regular transaction that can be found on the bitcoin blockchain.
Next up, you connect to a node that is on the Lightning Network. This connection is called a channel. Using a channel, you are able to send bitcoin to anyone you’d like that is also connected to the Lightning Network. The transactions that are done on the network won’t be visible on the blockchain.
So when would the Lightning Network come in handy? Let’s say you purchase a cup of coffee on the train station every day on your way to work. If you would like to pay for your coffee in bitcoin, it could take up to ten minutes before your transaction is executed. But with the Lightning Network, you connect to a node, which immediately sends your bitcoin to the coffee company with lightning speed, outside of the blockchain.
Sending bitcoin with the Lightning Network
Sending transactions with the Lightning Network works differently than a regular bitcoin transaction. With bitcoin, transactions are bundled and processed in blocks. On the Lightning Network, every transaction is carried out separately. Your transaction will reach its destination through several nodes on the Lightning Network. A Lightning transaction looks something like this:
From the Lightning Network back to blockchain
If you won’t be purchasing coffee on the train station anymore, you can close the payment channel you’ve created with the node. After its closed, you can send the bitcoin in your Lightning wallet back to your bitcoin wallet. Only that last transaction will appear on the blockchain. All other transactions have been carried out on the Lightning Network. That way, the bitcoin network(the blockchain) won’t be overloaded.
How is the Lightning Network doing currently?
The Lightning Network went live in February 2018. Since then, the network has been growing rapidly. There are more and more nodes on the network, more and more people who use it, and the capacity of the network keeps expanding.
But the Lightning Networks still in its infancy. For those who just started using the Lightning Network, it can be quite complex. You will need to create a separate wallet, and starting a payment channel isn’t easy either. The usability is still below par.
At the moment, there is a lot of work being done on the infrastructure of the network. In addition, new, user-friendly apps need to be developed to increase adoption. So in the future the Lightning Network will be more developed, and ready to be used by the masses.
Are there solutions besides the Lightning Network?
The Lightning Network is a so-called ‘second layer solution’: the scalability problem is solved with a second layer, apart from the blockchain. But, there are also some solutions that try to fix the scalability problem within the blockchain itself.
In 2017, the Bitcoin protocol got a major update: SegWit. SegWit is short for Segregated Witness and enables the network to separate transaction data from signature data in a transaction block. Signatures take up less space this way, which means more transactions will fit in one block.
Adjusting the block size
A completely different solution to solve the scalability problem is to enhance the block size. That is what Bitcoin Cash has done. Bitcoin Cash has derived from Bitcoin during a hard fork and originated on August 1st, 2017.
The Bitcoin Cash community doesn’t feel SegWit and the Lightning Network are appropriate solutions, and decided to increase the block size. Initially, the block size was increased from 1MB to 8MB. After an update that took place on May 15th 2018, blocks of 32MB can be processed.