Bitcoin has been plagued by numerous technical obstacles, which have become more apparent in conjunction with its surge in value.
A crucial problem for any blockchain-based cryptocurrency is how to scale it while maintaining a decentralised network.
This has been an issue within the Bitcoin community, culminating in a “civil war” between Bitcoin Cash and the original Bitcoin.
Bitcoin transactions are currently expensive and can take hours to be verified on the blockchain, making it difficult to use for quick payments.
Once a scaling solution has been implemented on the blockchain, however, Bitcoin will become easier and cheaper to use – functioning as “digital cash”.
Bitcoin Cash and SegWit
Bitcoin Cash was born out of the idea of increasing blockchain block size to process more transactions.
By increasing the block size, the number of transactions processed per block increases and more transactions can be included in the same amount of time.
There are several drawbacks to this scaling method, though, which is why the Bitcoin Core community opted to pursue other scaling solutions.
SegWit (Segregated Witness) has now been implemented on the main Bitcoin blockchain, and aims to effectively increase block sizes to 1.8MB while removing the malleability of transaction IDs.
This upgrade is backwards-compatible with previous transactions on the Bitcoin blockchain and paves the way for the implementation of the Lightning Network – a scaling solution which requires un-modifiable transaction IDs to retain security.
SegWit is currently being implemented by Bitcoin nodes around the world, but will not be able to solve the scaling problem singlehandedly.
For that, many Bitcoin advocates have placed their faith in the Lightning Network.
The Lightning Network plans to solve the blockchain scalability problem by implementing an off-chain solution which uses the security of the blockchain to periodically verify payments.
Off-chain scaling solutions have great potential for improving the transaction capacity of blockchains, as they only periodically settle their transaction record on the chain while computing transactions on a separate, linked network.
The Lightning Network works by creating payment channels between users and using its second-layer network to process transactions between users with open payment channels.
Payment channels exist as smart contracts on the Bitcoin blockchain, and can be used by Lightning Network users to settle their transactions on the actual blockchain.
Participants with open payment channels form a decentralised second-layer network which offers instant transactions with extremely low fees, making it preferable for Bitcoin users to open Lightning Network channels and send money over the second-layer network.
The successful implementation of the Lightning Network on the Bitcoin blockchain will open the cryptocurrency to a new world of applications and make it as spendable as fiat currency.
The Lightning Network is expected to be implemented on the Bitcoin blockchain this year, with developers testing payment channels and finalising the network’s architecture.