Developers love scalability, and cryptocurrency developers are certainly no exception. Considering the current energy and time and that Bitcoin burns to process transactions, it seems pretty obvious that we need faster solutions. The very process of validating transactions by every node in the network (regardless of the importance of the transaction or its size) is tedious, and so Bitcoin is able to process about 3 transactions per second – a single digit figure. What’s more – a Bitcoin transaction now consumes as much energy as an average house!
If Bitcoin really does want to become the payment platform of the future, it obviously needs to do a lot better. Even traditional financial systems like VISA, which Bitcoin aims to compete with, can do thousands of transactions per second.
Think of it this way – two friends who frequently exchange funds set up a payment channel for convenient payments. Let’s call them Satoshi and Vitarik. Now, both can exchange as many funds via this channel as they like, but these exchanges won’t be registered on the underlying blockchain. Instead, they will be recorded in a tiny ledger local to the payment channel. After a certain amount of time, the net transaction between the two friends is “summarised” and then registered on the blockchain. So if Satoshi first sends $15 to Vitarik and then Vitarik sends $10 back to Satoshi, these individual transactions are recorded in the local ledger but not on the underlying blockchain. The net amount, which is a $5 transaction from Satoshi to Vitarik is summarised and is the one that gets registered on the blockchain. So there may have been many transactions between the two friends, but only 2 are recorded on the Bitcoin blockchain – the creation of the payment channel and its summarised closing.
The idea of such summarising is not new. A similar technique is used by Git, a popular and distributed source code management system used by most of the developers out there. Git uses this technique to “stage” multiple changes to a single “commit” and then while transferring such commits across the network.
The method mentioned above has some pretty obvious advantages. First, since the individual payments aren’t registered on the blockchain, they’re fast. And, theoretically, there can be as many transactions one can do via the created payment channel. Furthermore, these channels can be utilized to their peaks. There is no need to have redundant payment channels. For example, consider that Satoshi has a third friend Charles, and a payment channel with him already set up. Now if Vitarik wants to send money to Charles, he does not have to create a payment channel for him. Vitarik can simply utilize the existing payment channels – one between him and Satoshi and the other between Satoshi and Charles, to make the payment. Now that’s some good efficiency. This network of payment channels is, essentially, the lightning network. Moreover, since there are fewer transactions now that are directly recorded on the blockchain, power consumption is reduced.
However, keep in mind that all these transactions are still being done via real Bitcoin transactions. There’s no security tradeoff here. The difference from the traditional protocol is that these transactions aren’t all stored in a blockchain block, instead just the payment channel creation and completion (summarization) events are recorded on the chain. This is actually good because not all transactions are important.
But it’s important to remember that the lightning network technology, however good it may seem, is still experimental. Thus, it has just as many skeptics as Bitcoin itself has, if not more. This is partially because a similar “off-chain” scaling technology, called “segwit”, was tested on Bitcoin but it didn’t immediately get a lot of adoption. Only time will tell the true success that the lightning network technology achieves and the true improvements that it brings to the Bitcoin community.
As of now, it seems that the positives of this technology outnumber the negative aspects of it, and people who are skeptical about it need to be reminded that many of them were once skeptical of Bitcoin itself.
Saurabh Chaturvedi is a freelance developer and technical writer with a keen interest in blockchain, Bitcoin, and other cryptocurrencies.
You can reach out directly to discuss our market development services by sending an email to julia at dailyfintech dot com
Get fresh daily insights from an amazing team of Fintech thought leaders around the world. Ride the Fintech wave by reading us daily in your email.