As fast as Lightning: Off-chain scaling solutions to improve the Bitcoin network

In the early days of Bitcoin, we were promised near-instant, low-cost transactions from anywhere in the world. Bitcoin began to revolutionize everyday purchases and disrupt the way we exchange value. Bitcoin ATMs popped up in major cities allowing entry points to the network for average users. Coffee shops, pizza parlors, and other businesses started accepting Bitcoin, and making news because of it. We all remember the two pizzas worth millions now.

However, times have changed. Even Bitcoin's earliest adopters and strongest proponents realize there's a problem. Transactions can take hours, and fees have made small payments unpractical. No one wants to buy a $20 pizza in Bitcoin if the fee is nearly half that. The "peer-to-peer digital cash" is struggling to perform well in its main use case. While many are bullish on Bitcoin's ability to scale in the future, it is apparent that scalability needs to be addressed sooner rather than later. Other blockchains have realized these issues and are introducing new protocols to try and solve them. So far none have been able to overtake Bitcoin for the top spot, but this does not mean Bitcoin should not address its own issues.

The Bitcoin network mines blocks every ten minutes. This is intentional. However, it means that the fastest, on-chain transaction between two parties is 10 minutes. Even then it is only one confirmation. To ensure that a transaction is written to the blockchain in the next block (ten minutes), users must pay higher fees. Network congestion, the desire for fast confirmations, and limited block space massively increase the fees associated with transactions. If users don't want to pay higher fees, their transactions will not be included in the next block, and they may have to wait a long for a long time before their transaction is written to the blockchain. Thus, the "nearly-instant" and "practically free" transfers promised at Bitcoin's genesis are virtually impossible. Many users end up abandoning their transactions altogether.

Both on-chain and off-chain scaling solutions have been proposed, and one worth highlighting in particular is something called the Lightning Network. The Lightning Network is a set of off-chain payment channels that parties can set up for near-instant transactions. Since the transactions do not happen on chain, they do not incur the fees associated with transacting on the blockchain. It is a second-layer payment protocol that powers instant transactions between nodes, and does not require third parties. Smart contracts act as ledgers within payment channels, securely keeping the balances of the parties in the channel. The only time these transactions go on-chain are when parties enter or leave contracts, so that is the only time that users would pay transaction fees.

On the Bitcoin mainnet, user-initiated transactions must be packaged to blocks and broadcast to the network, mined by miners, then confirmed by each node. But with the Lightning Network, an authentication process is not needed (outside of the payment channel ledger itself), and each transaction is made directly with the counterpart. The Lightning Network speeds up transaction times greatly and reduces fees since it does not require mining or confirmations within the payment channel itself. There is no "blocksize" within the Lightning Network, increasing the scale of the Bitcoin network, allowing users to send large amounts of data.

Transaction costs and scalability friction are major deterrents to blockchain's mainstream adoption. To promote the everyday use of cryptocurrencies, we need to make transactions easy and cost-effective. This requires openness to new innovations in protocols like the Lightning Network. By adopting new scaling solutions and constantly improving usability, we can help cryptocurrency achieve its tremendous potential, and maybe even use it to buy pizza again.

About the author:

Jeff Garzik, Board Member & Chief Scientist of United Bitcoin. A futurist, entrepreneur and software engineer, Jeff is also co-founder and CEO of Bloq, a leading blockchain technology company. Jeff is also the chief designer of Metronome.

Jeff serves on the board of Coin Center, and the advisory boards of BitFury, BitPay, Chain.com, Netki and WayPaver Labs. He has delivered presentations on bitcoin and blockchain technology at TEDx, State of Digital Money, and Scaling Bitcoin, as well as private briefings to corporations, governments, central banks and hedge funds. Jeff was also recently appointed to the Linux Foundation board of directors, as well as the World Economic Forum Expert Network as an expert in information technology.