What Lightning Network Means For The Future Of Bitcoin

Bitcoin’s Scalability Problems
Many people believe that bitcoin is the future of our financial system. But there is a big issue standing in the way of this goal, and that is scalability.

Currently, bitcoin’s network can only process a maximum of 10 transactions per second. In reality, the network only handles around 4-5 transactions per second, as 10 transactions per second is only a theoretical maximum under optimal conditions. Compare bitcoin’s limitations to Visa (NYSE:V) or PayPal (NASDAQ:PYPL). Visa handles on average around 2,000 transactions per second, with a daily peak rate of 4,000 transactions per second. It has a peak capacity of 56,000 transactions per second; however, they never actually use more than a third of this even during peak shopping periods. PayPal handles on average 10 million transactions per day for an average of 115 transactions per second.

As a result of bitcoin’s relatively low maximum transaction speed, it keeps a large backlog of unconfirmed transactions, leading to a multitude of problems, including long transaction confirmation times and high transaction fees.

Clearly the main blockchain isn’t very scalable. But as it turns out, it doesn’t have to be. The community has come up with a new technique called the Lightning Network to solve the scalability issues. The key idea is that small and everyday transactions don’t have to be stored on the main blockchain. This bypasses the 10 transaction per second limit and is also called the off-chain approach.

Lightning Network
The Lightning Network is a proposed solution to the bitcoin scalability problem. The network would use an off-chain protocol and is currently under development. It would feature a P2P system for making micropayments of digital cryptocurrency through a scale-free network of bidirectional payment channels without delegating custody of funds or trust to third parties.

 

Data provided by seekingalpha.com