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Lightning Network as a Solution for Resolving Bitcoin’s Scalability Problem

Lightning Network as a Solution for Resolving Bitcoin’s Scalability Problem

 

Introduction

There are a lot of news coming from  the cryptocurrency space , one of the most important of them is so-called Bitcoin’s scalability problem.
 
Such hard forks as the Bitcoin Cash and the canceled SegWit2x were both considered as solutions to mitigate the Bitcoin network scaling issue.  
 
In this article, we are going to discuss one of the most promising solutions that may help to resolve the issue  — the Lightning Network.
 
To realize why this is so important, let’s review the problem addressed by that Lightning Network.
 
When one client wants to send some Bitcoins to another client, he/she will receive funds in about a couple of hours, and also a heavy transaction fee should be paid too. 
 
Logically having known such issues, how are Blockchains going to take over the financial world? That's why any idea that can solve the scalability issue of Blockchains is deserving attention, efforts and time. Lightning Network perhaps belongs to one of such ideas. Prior diving into the solution idea, the scalability problem needs to get more explanation.
 
If you are already familiar with the problem, you can skip this section and directly jump to the next section.

Why Are Blockchains slow? 

First of all, think of a Blockchain as a record register.
 
This register consists of a large number of pages (blocks) where several transactions stored on every page.  
 
Every page (Block) needs to be filled with transactions before to be added to the register, and only after that record of new transactions on next page (Block) starts.   
 
Since register has distributed nature,  prior adding a page (block) to the register (chain of blocks)  some processing needs to be done to guarantee that every party agrees with the content of the candidate block. 
 
The process roughly takes around 10 minutes (for Bitcoin Blockchain) for each block.
 
On the figure below, you can see how transaction process of 1 BTC transfer looks like.
 
Amongst other things, a transaction contains information about the sender, the recipient, the amount and the transaction fee.

What is transaction fee?

There is no miracle in existence of an additional fee. 
 
The principal purpose of it is to incentivize miners to include your transaction in a block ASAP. 
 
Moreover, there is no the predefined price of the fee, so it's entirely up to decide how much you pay to speed up the process. 
 
The chosen price of the fee has a direct effect on the speed of your transaction processing time. 
 
At every moment, there might be several transactions awaiting to be recorded on the current page.
The miners, i.e., computers processing in the Blockchain network,  make decisions about what transactions to include in the current block. They look which transactions yield the most rewards for them during the making of the decision.  It means that the transactions with the highest transaction fee will be added to block first.
 
If there are enough transactions with a higher transaction fee than yours to fill up the block, your transaction will have to wait in queue. The wait can last from a few minutes to a few hours. And sometimes, even days. The more you pay in transaction fees, the quicker your transaction is processed.
In case if your proposed transaction fee is less than others awaiting for inclusion into the block, your transaction will be put into the waiting queue, and the block will be filled with the required amount of other transactions with a higher transaction fee. 
 
The wait time can last from a few minutes to even days. 
 
So, to speed up your transaction time you need to pay more, the more you pay, the faster your transaction is processed.
 
Unsurprisingly, current architecture of Blockchain BASED currencies is slow, and consequently, expensive for everybody. 
 
In the ideal case, the usage of Blockchain would lead to more transactions processed,  but in the real world increasing amount of transactions slows down the network, and moreover, the size of the whole Blockchain rapidly grows.  What an oxymoron!
 
So let's take a look at so-called Lightning Network (LN), which posses to resolve the problem.

So what is Lightning Network again?

Due to the nature of Blockchain, LN proposes not to put all transactions to be recorded on the Blockchain. Instead, it offers the concept of payment channels.
The following example explains the above mentioned concept.
 
Let's assume that you have two clients regularly making transactions between them.  In such a case, they can avoid recording the transactions on the Blockchain and transfer them off the chain. That means that these clients open payment channel between them and register its opening on the separate Blockchain. 
 
After that, they can make any amount of transactions between them through the opened payment channel. When payment channel is closed, the final balance information is written to currency Blockchain. 
 
The concept of payment channel allows creating a network of payment channels and as a result decrease amount of  transactions required to written on the currency Blockchain. 

Example: 

Client 1 has opened payment the channel with Client 2
Client 2 has opened the channel with Client 3.
Client 1 wants to pay Client 3, to organise the transaction Client2 will transfer funds to Client 3, and Client 1 will reimburse transferred funds to Client 2.  Since you will be touching the currency Blockchain often, transactions will be performed at lightning speed. 

Let's take a more precise look at LN.

And what are those payment channels? 

It’s like a safety deposit box where two people deposit equal amounts of money and each put a lock on it.
The payment channel initiation starts from depositing equal amounts of money in a common box by both counter parties, that event creates a record 'Opening Transaction' on the Blockchain,  hereafter a payment channel is open between those two sides.
 
The deposited funds are locked in such a box in a way that only both parties can spend from the box, single channel user cannot spend the money without the other. 
Funds stored in such box are used for transactions between two channel parties.

Example:

Client 1 and Client 2 pool in 5 BTC each in the common box.
Client 1 wants to send 3 BTC to Client 2, instead of direct traction through BTC Blockchain Client 1 transfer a promise of  ownership for 3 BTC to Client 2 in the common box. After the transfer of promise and if the box is unlocked Client 2 will be able to take 8 BTC, and Client 1 will be able to claim 2 BTC from it.
 
Summarising all said about, payment channel is a combination of pooling some money together, and then transferring the promise of ownership of the pooled-in money in the agreed upon manner. 
The channel can be closed by any of counterparts, after that, all sides will get transfers of current balance via currency Blockchain.
 
That's how the concept of payment channels works. But real potential and power of them are unleashed when more than one payment channels are combined into a network - The Lightning Network.

How does network actually work? 

Lightning Network shifts value from the ownership of the assets (Bitcoins) to the promise of ownership of the asset (Bitcoins).
The main benefit of such payment channels network is that huge chunk of transactions can be off-loaded from currency Blockchain and be carried out off the chain freeing up the bandwidth of the currency blockchain and getting a fantastic speed of transactions throughput and without a hefty transaction fee.

Conclusions

The technology looks promising, but as always has a bunch of open problems need to be resolved.

For some cryptocurrency purists, this increased centralisation is reason enough to be against implementation of the Lightning Network. Most people who feel this way are in favour of larger blocks to scale the network, which has its own drawbacks as mentioned earlier. 

Ultimately, these large payment hubs are not at all like central banks. They never actually possess or store your money in any way – that is still done by trustless smart contracts. Instead, they are simply a trustless medium for quick and cheap transactions. 

From the other side LN has a couple of serious concerns regarding engineering:

Protocol decisions are still undergoing and require to have enough extensibility. 

  • Routing of micropayments might be an issue between different payment channels.
  • The protocol must be as trustless as possible and verified prior production use.
  • LN Reputation systems are centralising the network.
  • Still opened a question about adding additional nodes. 
  • Traffic analysis is also an issue: micropayments are potentially even more sensitive than large transactions for tracking 
 
You can learn more about the cryptography behind Lightning Network and its possible applications here. Also, developers discussion can be found here
 
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