Bitcoin Lightning Network

The bitcoin Lightning Network is an off-chain scaling solution.

In the scaling debate of bitcoin, there has been fierce debate and enmity over how to best preserve the ideals of which the cryptocurrency was founded. Essentially, there are two camps in this debate on how to allow bitcoin to be more widely used and cheaper while keeping it decentralized. Both camps have parted ways to develop their vision for bitcoin and prove their coin is superior.

The first camp, led largely by the bitcoin core developers and businesses using bitcoin, believes the solution to bitcoin’s scaling woes, which have led to high transaction costs and slow confirmation times, is off-chain or second-layer scaling. This group believes the bitcoin block size of one megabyte should not be altered, and that as many tansactions as possible be done outside of the main chain to preserve this block size and make transactions cheaper and faster, though with ultimate settlement of bitcoin ownership on the main chain. This solution, created by Joseph Poon and Thaddeus Dryja and developed by a company called Blockstream, is referred to as the Lightning Network.

The Lightning Network allows users to set up separate payment channels outside of the main chain to transact cheaply and instantly. Users simply must deposit bitcoin into the channel, and using the channel can engage in transactions with other users that also have deposited bitcoin. As users transact on the Lightning Network, their accounts are credited and debited according to their activities. At any point in time, users can broadcast the bitcoin left in their account to the main chain. The foundation for the Lightning Network was the Segwit upgrade to bitcoin that occurred in the latter part of 2017, which was a soft fork that allowed users to transact with less information in the blocks, essentially doubling the capacity of the blocks.

For users to transact with one another on the Lightning Network, an open channel between every user is not necessary. Nodes or hubs with many open channels can open up to serve as intermediaries between users, and for serving this purpose can collect a small amount in fees from each transaction, thus incentivizing their existence. Concerns have been raised about the potential for centralization under this system, with hubs acting in a similar manner to banks, though these hubs will not be required for using bitcoin, and users will always be able to transact on the main chain and by other means that may develop in the future if they choose.

The second camp initiated a hard fork also in the latter part of 2017 to increase the block size to eight megabytes. This version of bitcoin is referred to as Bitcoin Cash, which was given to bitcoin owners in an amount equal to their ownership of bitcoin.  Much of the community behind bitcoin reacted strongly against Bitcoin Cash when it emerged, perceiving it as a threat to bitcoin by creating confusion among the general public over the bitcoin brand and believing it to sow discord within the bitcoin community. Much of the bitcoin community also believed that larger block sizes would lead to greater centralization, since larger blocks would require greater resources to store the blockchain and mine, creating a concentration of nodes among wealthy players or organizations. This fear has largely borne fruit, as a few miners mine almost all Bitcoin Cash blocks.

Bitcoin Cash is also not as fast as other cryptocurrencies such as Litecoin or Dogecoin, which have much shorter block times, nor is it necessarily cheap, with average fees reaching as high as .80 to .90 during times of relatively high network use. However, Bitcoin Cash may implement key upgrades that can drastically reduce fees and make transactions instant using a different scaling approach than the original bitcoin.

The Lightning Network has officially been released on the mainnet, though with the caveat that it’s still in development and funds may be at risk due to known or unknown bugs. Currently, over 1,600 nodes and 5,000 channels are operating, with growth that has been exponential. Though skeptics dismissed bitcoin during the height of its scaling difficulties in 2017, the infrastructure for allowing it to go mainstream is currently being built.