Bitcoin Lightning Network

Lightning Network is a protocol on top of the Bitcoin blockchain.
The Lightning Network may solve the Bitcoin scalability problem.

Bitcoin scalability is a contentious and important issue at the moment. The issue of scalability and increasing transaction fees came to a head recently with the Bitcoin Cash fork. Proponents of Bitcoin Cash (an altcoin) wanted larger blocks. When segwit2x failed they hard-forked off from Bitcoin to create Bitcoin Cash. The issue is increasing fees for space inside a Bitcoin block. At the time of writing it can cost as much as $5 to ensure space in the next Bitcoin block!

Since Bitcoin is increasing in usage and popularity and Bitcoin blocks can currently hold just one megabyte of transaction data the blocks are filling to capacity. While this is good since it means Bitcoin is growing it also means the Bitcoin bottleneck problem is real. Each Bitcoin transaction bids to get data inside a block through the transaction fee. If your fee is too low your transaction may not get into a block and ultimately may get orphaned (lost forever).

There are two potential solutions to this problem. The first is to increase the data each block can hold from one megabyte to a larger amount, this is the solution Bitcoin Cash and others such as Bitcoin XT have tried to implement. The second is to layer another protocol on top of the Bitcoin block chain and this is the approach of the Lightning Network.

Each solution comes with its own set of problems. Increase the block size too much and you will make it harder for Bitcoin to remain decentralized. By reducing the potential systems that can run a full node you push the network closer to centralization. The size of the Bitcoin block-chain might not become unwieldy at 2MB per block or even 4MB per block but when you get to 8MB a block or larger then centralization becomes very real and a big problem. So instead of a patch by increasing block size Bitcoin needs something more substantial. For true scalability in the long term there has to be a better solution. To conduct micro-transactions and scale for use by the entire globe Bitcoin needs the Lightning Network.

The Lightning Network will be a protocol on top of the Bitcoin block chain. By processing many transactions through the Lightning Network then later settling the end result on the block chain the amount of data required will be reduced, the speed of transactions will be increased to instant, and cross-blockchain transactions will be possible. Similar to how the Internet runs on a protocol stack (TCP/IP stack) the future of Bitcoin is likely also a protocol stack. Segwit was the first step in implementing the Lightning Network since for LN to function it requires Segwit to be enabled.

Of course the Lightning Network has been discussed for a long time by the Bitcoin developer community and set back in its release many times. Hopefully in 2018 we can see the Lightning Network come online and Bitcoin can once again be used for micro-transactions as it was before. If the Lightning Network does reduce network congestion and restore Bitcoin’s functionality as a¬†currency¬†as well as a store-of-value then we can see more huge gains to the market price. If Lightning Network is continuously set back or fails some other way we will see a Bitcoin competitor (altcoin) take the mantle of king of the cryptocurrencies. Without Lightning Network or another scalability solution Bitcoin will remain a store-of-value and/or slowly fade away as the flagship cryptocurrency.

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