Bitcoin lightning network may solve blockchain scalability

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You could think of it like opening a tab at a bar, or perhaps a better analogy would be leaving your pre-authorised credit card with the bartender. Instead he adds it all up at the end of the night - minus any discounts, refunds for that dodgy cocktail, and taking into account the 20 your friend dropped in. The final bill is what gets charged to your card in a single payment - and thus our lightning channel gets closed, when this single net transaction gets written to the blockchain.

The network automatically finds the shortest route, and establishes the required smart contracts across it, however many links are involved. In theory, everyone should be connected to everyone else through the network via only few nodes. Users are incentivised running these connecting nodes through micro-fees that are paid out every time a transaction uses one of their connections. With the total number of active nodes on the lightning network exceeding 2, in April , with 5, open channels, this suggests a sufficiently decentralized network is already starting to exist, along with a clear proof-of-need for this secondary service.

Whilst the idea of this secondary layer had been under discussion for some years, implementation was made possible by the adoption of SegWit on the bitcoin and litecoin networks. This fixed aspects of transaction malleability, without which transactions on the lightning network would have been too risky to be practical. Of course without the realtime security of the main blockchain behind it, the lightning network does not carry the same intrinsic protection - which is why each channel is underwritten with an amount of pre-funding.

But even if larger transfers will always be done using the decentralized security of the original layer, there are so many cases where the balance of risk vs speed supports the use of off-chain deals. For example for micropayments, solving a major challenge the sovereign currency infrastructure has never managed to address.

To put this into perspective, according to the white paper, the Visa payment network is believed to complete 45, transactions per second during a standard holiday period. This increases to hundreds of millions on an average business day. Bitcoin currently supports approximately seven transactions per second, and is limited to one megabyte of block space. To achieve more than 45, transactions per second, Poon and Dryja say that bitcoin transactions must be conducted off the blockchain itself.

The white paper notes: "If only two parties care about a transaction, it's not necessary for all other nodes in the bitcoin network to know about that transaction. It is instead preferable to only have the bare minimum of information on the blockchain. This can be achieved by using timelocks as a component to global consensus. The white paper states: "The obligation to deliver funds to an end-recipient is achieved through a process of chained delegation.

Each participant along the path assumes the obligation to deliver a particular recipient. They pass on this obligation to the next participant in the path. They argue that in such scenarios, bitcoins on the network are controlled by Coinbase to avoid the complications of settling small transactions in real-time on the network. Lightning, they argue, presents an alternative where users are in control of funds. The Lightning Network is not the only project seeking for a sustainable solution to micropayments, however.

BlockCypher recently proposed a solution by which it plans to "calculate miners' fees opportunistically" to ensure microtransactions are added to the blockchain. The system is already in use by Zapchain, the bitcoin-focused social network that recently launched a dedicated micropayments channel.

Decrementing timelocks A hash-time locked contract is first opened by creating a transaction output which only the final recipient can redeem. The recipient will generate random data 'R', and then hash 'R' using hash R to produce 'H'. This information is passed on directly from the receiver to the sender of the funds, along with the recipient's bitcoin address.

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