Lightning Network, SegWit, Atomic Swap and other ways of improving the scalability of Bitcoin
Bitcoin is powered by software that was created in 2007-2009. Despite the many improvements that developers have made throughout the existence of bitcoin, the main code remained the same as 10 years ago.
The problem is that now the world of bitcoin is significantly different from what it was at the dawn of cryptocurrency development. The number of users has grown from a few dozen people to several tens of millions.
The user base growth is predictably accompanied by an increase in the number of transactions, which is hundreds of thousands per day. The unpleasant reality is that the bitcoin network in its current state cannot process all the transactions fast enough.
Now theoretically bitcoin network can process 5-7 transactions per minute. In fact, the performance does not exceed 3-4 transactions. A typical situation is when users wait for hours or even days for their transaction to complete. For comparison, the international Visa system carries out 2 thousand operations per second.
Learn current stage of Bitcoin
Does the scaling problem have a solution?
There were many ways to solve the problem, but none of them has been implemented to date.
The problem of scaling has been studied for a long time. The first two serious proposals are contained in the BIP 100 and BIP101, where BIP means “Bitcoin Improvement Proposal”. They were introduced in 2015.
Both proposals mention an increase in the block size limit, and both of these solutions are hard forks, that is, in the case of their implementation, older versions of bitcoin software will be incompatible with the new network. The difference between them is that BIP 100 offers to adjust the block size depending on the miners’ solution, while BIP 101 is a direct one-time increase from one to eight megabytes.
The bitcoin community was hotly debating about which of the proposals to accept throughout 2015. However, the debates were infertile. Neither BIP 100 nor BIP 101 haven’t been implemented to date.
How does SegWit scale bitcoin?
SegWit was implemented in 2016 and increases the capacity of blocks without having to resize them. SegWit does not deal with the block size limit at all. It was originally designed to address a very different issue related to transaction flexibility. In short, SegWit was going to take non-critical transaction data out of the blockchain.
Deleting data reduces the size of each transaction so that more transactions are placed in a block of the same size. This can result in approximately a 60-70 percent increase in network bandwidth, in other words, it is a short-term solution to the problem.
More importantly, eliminating the flexibility of transactions makes the bitcoin network secure enough for various solutions outside of the blockchain, such as Lightning Network, to be built on top of it. This will make online transactions much faster and cheaper than ever.
How can sidechains and Lightning Network help here?
Sidechain is a third-party chain of calculations beyond the main blockchain. In this way, it is possible to distribute part of the transactions between them and thereby remove some of the load from the main network.
Sidechains conceived to have their own protocols computation rules and a set of functions, but they must all be associated with bitcoin blockchain and be protected by its protocol.
One of such projects with the use of smart contracts is Lightning Network.
Its essence is to form private channels between users that would function in addition to the main chain of calculations. At the same time, the channels work without any intermediaries. According to the authors’ idea, only the final result of transactions is translated into the main chain, not the whole process of calculations.
Thus, intra-channel payments are instant and don’t take several hours, as it is now in the mainnet bitcoin blockchain. In theory, this system should scale to a billion transactions per day without any commission, or with minimal fees.
In addition to instant and free transactions in the Bitcoin network, with Lightning Network it is also possible to link several blockchains running on the Proof-of-Work algorithm. This technology is called Atomic Swap and allows exchanging Bitcoin, Litecoin, Vertcoin, Decreed and others without the participation of centralized systems (exchanges or exchangers).
For now, Lightning Network is supported by 1200 nodes and is still in the process of testing.
Confidential Transaction & Coinjoin
Initially, Bitcoin was created as an anonymous cryptocurrency. When creating a wallet, the user receives only a public key that is not tied to a specific person. But if the user once tied himself to the address of the wallet, for example, showing out his wallet in the social network, the history of all its transactions becomes available to other members of the network.
Confidential Transaction solves this problem. After the introduction of this technology, we will see all incoming and outgoing transactions in each block, but will not see their connection with each other.
An additional advantage of this technology will be a reduction in the growth rate of the node, as one transaction will need only one signature.
The SegWit implementation also allowed the developers of Bitcoin Core to study the effectiveness of the technology of Schnorr multisignatures as issues of Bitcoin scalability in the beginning of 2018. This scheme is a combination of signature and verification algorithm, when several signatories, each with its own public and private key, sign a single message. As a result, instead of the existing scheme of generating individual signatures for each new transaction, participants can use only one. This single signature can be verified by anyone who also knows the message and public keys of the signers. Since this technology involves the grouping of digital signatures and keys, it will make transactions smaller and their verification faster, thus solving the problems of low network bandwidth and high fees.
Despite the abundance of bitcoin scalability options offered, the community is still unable to come to a consensus. Lightning Network is still in alpha testing and is the most anticipated technology among crypto enthusiasts. For the rest, the crypto community has to rely on Bitcoin Core developers and expect their solutions, hoping that in the near future the load on the system will not be as high as in 2017.
Read about other consensus algorithms