Bitcoin and the Lightning Network: An Introduction to Scalability Solutions
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- With the popularity of Bitcoin, the transactions on its network increase, resulting in slower transactions with higher fees.
- This is where a heaven-sent layer-2 scaling solution built on top of the Bitcoin blockchain was born six years ago, the Lightning Network.
- The Lightning Network provides scalability to the Bitcoin network by significantly reducing the number of on-chain transactions required to settle payments.
While Bitcoin was presented as a purely peer-to-peer version of electronic cash, we cannot deny that because of its popularity, the transactions on its network also increased, which, most of the time, resulted in slower transactions with higher fees.
One of the prime examples of this scenario was in 2017, when the number of transactions in the Bitcoin Network skyrocketed and the average cost to process one transaction rose to $37, regardless of the transaction value.
Welcome to the Bitcoin Month Series on BitPinas, where we discuss everything Bitcoin. Please check out the other articles:
- Bitcoin Month: Origins and Key Milestones in Bitcoin’s History
- Bitcoin Pizza Day: The Story Behind the First-Ever Real-World BTC Transaction
- How to Buy and Store Bitcoin: A Step-by-Step Guide
- Bitcoin and the Lightning Network: An Introduction to Scalability Solutions
This is where a heaven-sent layer-2 scaling solution built on top of the Bitcoin blockchain was born six years ago, the Lightning Network.
What is a Scalability Solutions
The scalability of a blockchain network, including the Bitcoin Network, is one of its critical aspects, as it determines its ability to handle a larger number of transactions, accommodate a growing user base, and maintain efficiency and performance.
Meanwhile, scalability solutions in blockchain technology refer to various techniques and mechanisms designed to improve the scalability of a blockchain network.
An example of this is the Lightning Network, which provides scalability solutions for the Bitcoin Network.
What is the Lightning Network?
First hinted in February 2015, the Lightning Network’s mainnet was launched in January 2018, after a series of tests on the “testnet,” a replica of the original version of the Bitcoin network, was made.
Being a layer-2 network, the Lightning Network is built separately from the Bitcoin network BUT interacts with it.
In an article by Decrypt, the online publication compared the function of the network to the current settlement system used by companies like Visa and Mastercard, where when someone pays for something, the payment is not instantly settled; instead, a quick verification of funds from the buyer and a request from the seller happen, giving the green light for a transaction to take place. The actual settlement of funds happens later that time.
Now, since transactions on the Lightning Network are not made by complex keys but instead by QR codes, theoretically, it could allow more transactions to take place instantly. Thus, when using the Lightning Network, transactions will be faster and the fees will be cheaper.
What Type of Service Does it Give to the Bitcoin Network?
Basically, the Lightning Network provides scalability to the Bitcoin network by significantly reducing the number of on-chain transactions required to settle payments. Meaning, instead of every transaction being recorded on the Bitcoin Network, multiple transactions can occur off-chain within payment channels, increasing the network’s transaction capacity and reducing congestion.
The Lightning Network also offers fast and low-cost transactions, as participants can conduct transactions almost instantly with minimal fees within the off-chain payment channels. This makes transactions with small values feasible, as it could be hard to proceed with a transaction with a small value but has high on-chain fees.
It works as follows:
- Payment Channels: Participants can open payment channels between themselves. These payment channels are like private, off-chain tunnels that allow for the rapid and low-cost transfer of funds.
- Off-Chain Transactions: Once a payment channel is established, participants can conduct an unlimited number of transactions within that channel without the need to record each transaction on the blockchain.
- Bidirectional Payment Channels: Payment channels on the Lightning Network are bidirectional, meaning that funds can be transferred back and forth between participants as long as the total amount of funds does not exceed the initial balance allocated to the channel.
- Routing: It allows for transactions to be routed across multiple payment channels. If X wants to send funds to Y, but they do not have a direct payment channel, the Lightning Network can find a route through other participants in the network who have payment channels with both of them.
- Blockchain Settlement: At any time, either participant can choose to close the payment channel and settle the final balance on the Bitcoin blockchain. The final state of the channel is recorded on the blockchain, and the participants’ balances are updated accordingly.
By leveraging payment channels and off-chain transactions, the Lightning Network indeed enhances the scalability of the Bitcoin Network, allowing for a greater number of transactions to be processed while maintaining the security and decentralization of the underlying blockchain.
Are you satisfied with how the Lightning Network helps the Bitcoin Network? What are the features you wish the Lightning Network would enhance?
This article is published on BitPinas: Bitcoin and the Lightning Network: An Introduction to Scalability Solutions
Disclaimer: BitPinas articles and its external content are not financial advice. The team serves to deliver independent, unbiased news to provide information for Philippine-crypto and beyond.