Can The Lightning Network Solve Bitcoin's Scalability Problems?

As global regulators, financial institutions and governments grapple with the concept of digital currencies, and Bitcoin traders and investors begin to run up against systemic problems created by the cryptocurrency's meteoric rise in both price and popularity, software developers are stepping in, adding another layer to the blockchain, known as the Lightning Network.

The Lightning Network, a technological development touted as a solution to the scalability problem of Bitcoin’s network, reduces fees and transaction time. The authors behind the Lightning Network white paper are Joseph Poon and Thaddeus Dryja. The Lightning protocol specification was released on December 2017 and there are reports that the 'Lightning Charge' a micropayment processing system built on top of the Lightning Network, developed and powered by a San Francisco-based company called Blockstream, went live on January 18, 2018, albeit according to the company "the entire Lightning Network is still in a testing stage." Lightning Charge is expected to make it easier to build apps on top of the Lightning Network.

How does it work?

A brief summary of the Lightning Network, from the network's website, provides some insight:

“Funds are placed into a two-party, multisignature “channel" Bitcoin address. This channel is represented as an entry on the bitcoin public ledger. In order to spend funds from the channel, both parties must agree on the new balance. The current balance is stored as the most recent transaction signed by both parties, spending from the channel address. To make a payment, both parties sign a new exit transaction spending from the channel address. All old exit transactions are invalidated by doing so.

“The Lightning Network does not require cooperation from the counterparty to exit the channel. Both parties have the option to unilaterally close the channel, ending their relationship. Since all parties have multiple multisignature channels with many different users on this network, one can send a payment to any other party across this network.”

Witnessing Darwinism in action

A number of people have already shared their experiences using the Lightning Network, via social media. CoinTelegraph reports that the first physical transaction may have been completed on the Lighting Network.

A Reddit user, /u/btc_throwaway1337, even purchased a VPN router through a payment channel provided by TorGuard TorGuard, an anonymous VPN and proxy service provider which had earlier tweeted its acceptance of the Lightning Network.

Mike Landau, a developer, tweeted his excitement regarding usage and transaction speed:

As well, Ryan Radloff, co-founder and principal of CoinShares, the parent of XBT Provider, the first company to issue a Bitcoin ETN, tweeted:

Radloff explains that the Lightning Network has been designed to create a cheaper and faster payments layer for Bitcoin. The exciting part is that Bitcoin (the network not the currency), and other protocols are starting to develop layers, in which different utility and functionality can mature beyond just payments. He notes:

“This is analogous to the way the internet has developed an application layer, enabling tools (like Skype) to make the World Wide Web more useful for all of us.

It’s still too early to tell exactly how this will impact the price. However, if lightning network gains traction amongst users, then the utility and usefulness of bitcoin will increase, which in return will drive greater demand for bitcoins.”

But the Lightning Network may not be the ultimate solution to all of Bitcoin's scalability problems. Sam Brooks, Blockchain lead at Havven, a decentralized payment network, stresses that the Network will only partially solve issues. However, if this latest technological implementation also proves itself, investors can expect to see Bitcoin skyrocket, at least for a short while:

"While lightning (state channels) is a key blockchain scaling technology and will certainly improve transaction throughput in certain circumstances, it will only partially solve bitcoin's scaling challenges. But as with any positive announcement for Bitcoin it may result in a short term price rise.”

Remember Satoshi’s vision ….

Referencing the original paper released by Bitcoin's unknown designer (some believe designers), the anonymously named Satoshi Nakamoto, Dr. Jiangang Wu, chief development officer of the FUSION Foundation, a public blockchain company that's developing what it calls a cryptofinancial platform, reminds us of Satoshi’s vision and describes the Lighting Network as a connector technology. He says:

“To improve the efficiency of Bitcoin and realize Satoshi Nakamoto’s ideal of “a Peer-to-Peer Electronic Cash System” or improve the interoperability of Blockchains, the Lightning Network creatively uses channels to empower small amount payments, forks are trying to foster [the] ecosystem of Bitcoin by experimenting [with] various new technologies and sidechain technologies are trying to realize atomic transactions or connect every two blockchains.”

Wu believes these are all great attempts. He concludes that the “sidechain technology” is evolving very quickly. Indeed, that's clearly the way much in the cryptocurrency universe moves—at lightening speed.

Though every improvement to the basic blockchain is a win for cryptocurrency champions, the Lightening Network is still in its infancy. It remains unproven in the greater marketplace. Nevertheless, it signals a strong will among cryptocurrency adherents to continue to improve the asset class and in particular enhance Bitcoin's capabilities thus without doubt its longevity.