Introducing The Lightning Network!
If you’ve been around Bitcoin Ecosystem for a while now, most probably you have heard about Bitcoin’s scalability problems, and if not let’s just put it like this, Bitcoin is slow, very slow!
Currently the Bitcoin Network can handle a maximum of 7 transactions per second. This number is directly correlated with the block size limit Bitcoin’s blockchain have, which is 1MB (1,000,000 Bytes). On average every 10 minutes a bundle of transactions (block) is verified and added to the blockchain. The simple way to calculate the number of Transactions Per Second (TPS) Bitcoin can handle is to divide the block size limit by the expected average size of transactions, divided by the average number of seconds between blocks (600). For example, if you assume average transactions are 250 bytes, then you get the following:
6.6 TPS = 1,000,000 / 250 / 600
The average time that takes for your transaction to go through the Bitcoin Network is 1 hour, not bad compared to the time that takes a wire transaction to go through on the traditional banking system, which is 3-5 working days. What is the case compared to other networks such as Ethereum and Ripple though? According to this graph by Sunny Decree, the average time it takes for a transaction to go through the Ethereum Blockchain is 2 minutes and through Ripple 4 seconds!
Also the possible through put is way higher on other CryptoCurrencies. On Ethereum is 15 TPS and Ripple is 1500 TPS.
So now you can see how bad the actual situation is. What is the solution to this situation?
One layer VS Two layer solution Debate.
In 2010, Satoshi Nakamoto introduced the 1MB block size limit explaining that it’s a safety measure to prevent miners from creating large spam blocks, but the limit was not lifted before Satoshi mysteriously disappeared. As Bitcoin’s adoption grew over the years, so did transaction volume filling up that 1MB block and leaving transactions out for the next blocks. These remaining transactions are added to the mempool, the waiting place for unconfirmed transactions. So as the demand for transactions grew and the capacity of the network remained the same, mining fees skyrocketed as people were willing to pay more money so their transaction is included in the most recent block.
One proposed solution is the block size is the factor that keeps the Transactions Per Second ratio so low, is to increase the block size. This is the reason Bitcoin Cash hard fork happened back in 1st of August . Members of the Bitcoin developer community argued for a long time, since 2015, that an increase in the block size would solve this scalability issue and proposed an 8MB block size, which was rejected by the majority of the Bitcoin Community arguing that it would decrease the security of the network. Therefore a number of bigger block advocates went their own way and created their own CryptoCurrency. Most significantly, Bitcoin cash boasts a block size parameter limit eight times larger than that of Bitcoin.
The Lightning Network
As opposed to an on-chain solution (increased block size), The Lightning Network is a "second layer" payment protocol that operates on top of a blockchain (most commonly Bitcoin). It enables instant transactions between participating nodes and has been touted as a solution to the Bitcoin scalability problem. Instead of settling individual transactions on the main Blockchain, Lightning Network opens a channel between two individuals that frequently transact with each other and settles their transactions off-chain. Then once their transactions are over, let’s say 5 transactions, the channel on the lightning network is closed and the surplus of their transactions is broadcasted to the main Blockchain as 1 transaction. This way the job is done with 1 on-chain transaction instead of 5 that would have otherwise require.
Basically we don’t want to make the blocks bigger, we don’t want to make the tunnel wider. What we want to do is to reduce the through put to the tunnel and do transactions off-chain. You can read more about how the Lightning network actually works at the official site here.