Anyone who has kept up with the Bitcoin scaling debate over the past few years is destined to familiarize themselves with the terms Lightning Network and Off Chain Scaling Solutions that have come with promises of hundreds of millions of transactions per second and virtually zero fees. But how precisely are these technologies helping to scale the network of Bitcoin? Let us just look a little deeper.
The Lightning Network is, in the simplest terms, Bitcoin’s off-chain scaling solution that will allow for bidirectional payment channels. What this implies is that two users with Lightning Network can choose to open a private Bitcoin transaction channel without consulting the main blockchain to exchange Bitcoins among themselves. To open a channel, both parties must make an on-chain transaction stating the amount to be exchanged on the channel. After that, until one of them decides to close the channel, they can choose to do as many transactions as they want. The channel “settles” with the main Bitcoin blockchain after the channel is closed and the updated balances are paid out to both parties.
As per the white paper on the website of Lightning Network, the new technology will allow the Bitcoin network to handle instant payments at a very low cost that could be the foundation of a machine economy that will be needed by the devices enabled by Internet-of-Things. In addition, Lightning Network allows cross-chain atomic swaps off-chain instantaneously with other blockchains as long as they use the same cryptographic hash function. These additions enable the Bitcoin network to exponentially scale up to billions of transactions per second needed to facilitate microtransactions in the machine economy and bring affordable Bitcoin trains.
Because the Lightning Network transactions are off-chain handles, there’s no record of those transactions on the main chain that is very useful in restricting the size of the blockchain. The current Bitcoin blockchain is about 150 GB which is already enormous and if it continues to grow at its current rate, the centralized model of Bitcoin is bound to suffer as independent node owners would have to shut down their devices leading to larger data centers running enormously centralized nodes.
Not Fully Functioning– Maybe the Lightning Network’s biggest disadvantage at the moment is the fact that it’s not yet fully operational, so there’s no way to fully claim how good it is. It’s concept, however, looks great on paper, but it’s still impossible to find out if it’s going to look great once it’s realized.
The Complexity of Channels- The Lightning Network is conceived as a kind of channel web that should theoretically permit seamless transactions once it has been established. There’s no saying what’s gonna happen if the payment is going to have to take a route that’s too complicated. If your transaction is going to have to go through dozens of intermediate channels, the fees will certainly add up.
Channel Caps- Another disadvantage of the network is that the channels are capped in its latest version. That is, the maximum amount of funds in that channel is the number of Bitcoins stored in the wallet by the two users when a channel is established. This setup creates a situation where a few users on the main blockchain may have to choose between having liquidity within the channels of the Lightning Network and having liquidity outside them. This is far from ideal, particularly for resource-limited people.
Again, it is worth noting that the advantages and disadvantages of the above-mentioned Lightning Network are very speculative at the moment.
The situation isn’t all roses for Bitcoin’s future as the Lightning Network comes with its own set of issues, the primary of which is its decentralization aspect that is under much doubt. Because a payment channel works by having a certain amount of deposit in a bidirectional payment channel, in order for each user to become an active participant in a global decentralized mesh network where the network acts like a Directed Acyclic Graph, each user would have to have an average of four payment channels open.
If users perhaps have only a single channel open, the topology of the network will look like a hub-and-spoke model that leads to a lot of centralization for big data centers, or in the case of Bitcoin, big exchanges, and miners. Also, because setting up a Lightning Network payment channel needs a chain transaction per channel based on current network congestion statistics, setting up four payment channels each could take many months or even years for approximately 100,000,000 users. According to the debate on the official Bitcoin subreddit concerning Lightning Networks and decentralization, users came up with estimates that imply that for approximately 100,000,000 users to be part of the truly decentralized lightning network which lets them exchange $100, would need around 100,000,000 X 4 X $100 = $40,000,000,000 committed to open channels that based on current usage patterns, seems unlikely.
To sum up, Lightning Network is Bitcoin’s most advanced scaling solution, but whether it will increase or decrease overall centralization would depend on a lot of factors such as the number of people connected to the open channels and the influence of centralized exchanges and miners. Cross-chain atomic sweeps may provide another possible solution to the centralization problem, that could be useful in creating open channel records on the chain. Because Lightning Network is mainly used to exchange signatures, it can also be used to exchange signatures for contracts that are published on more than one blockchain at a time. This makes it possible to hyperlink multiple blockchains to each other, which is where Lightning Network’s real power lies.