The Lightning Network: Bitcoin’s Scalability Saviour?

February 2018
By Sam
Posted: Updated:

Bitcoin continues to be plagued by its own Achilles’ heel: increasingly high fees and an every slowing network.  Increasingly people are looking at new ways to address scalability without centralising blockchain in the process.   The Lightning Network is a decentralised system that sits above Bitcoin’s main net blockchain.  It is one of the first implementations of multi-party Smart Contract scripting.  It is in many ways a software play.  This off-chain, but on-chain, decentralised network is designed for instant, high-volume micropayments.  Lightning maintains Bitcoins decentralised design but speeds up processing by creating payment channels rather than requiring every transaction to be verified on-chain via consensus, which currently can take up to an hour or more depending on congestion.  The Lightning development team released their alpha version last month.

Large volume micropayment transactions require low fees and almost instant transaction speeds to meet consumer expectations around point of sale transactions. Lightning works like a payments ‘mind-map’ through which you can send payments to different parties, even if they are not directly connected to you.  This means that payments can be routed to parties that are indirectly connected through different nodes on the network, without mining.

Funds are deposited into a two-party, multi-signature “channel” bitcoin address.  This channel is represented as an entry on the bitcoin public ledger.  All parties must agree on the new balance of the fund in order to spend from the channel.  The current agreed balance is stored as the most recent transaction.  Both parties sign a new exit transaction spending from the channel address to make a payment.  Both parties have the option to close the channel, ending their relationship.  Only the final balance upon exit and closing is entered on the bitcoin public ledger.

The Lightning Network is important because it enables instant, end-to-end secure micropayments that leverage a technique called the HTLC, or Hash-Time-Locked-Contract. This allows payments to be sent across the network that are encrypted end-to-end , with no plaintext routes, meaning that privacy is the default.  This makes it highly secure and allows for payment flow similar to traditional financial infrastructures such as PayPal or Stripe.  The final result is a network of payment channels that could potentially process huge amounts of transactions without needlessly overloading the blockchain.  Most of Bitcoin transactions would be happening on the Lightning network, with on the final record of the transaction being entered on the blockchain.

The Lightning Network would allow scalability without forks or developer consensus.  Making Bitcoin relevant again rather than just as a store of value or commodity like Gold.  This represents a huge opportunity to build orders of magnitude in terms of numbers of transactions without losing the decentralisation of Bitcoin or needing a trusted custodian for your funds or third party payment provider like Visa.

In all fairness, the Lightning Network is highly experimental and currently only live for public tests. Even though Bitcoin enthusiasts have already conducted purchase using Lightning, it is a long way off being enterprise-grade.  There are however a number of projects currently working with Lightning on their own business applications for this technology in Internet of Things (IoT) and beyond.  Clearly, there is much for developers to play for when it comes to “off-chain” solutions built above ‘on-chain’ networks like Bitcoin or Ethereum.  Is scalability possible, in order to harness economies of scale, while maintaining decentralisation? The Lightning network is going to find out one way or the other.

By: CeAnn Simpson

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