The scalability of bitcoin is one of its most significant technological difficulties. The bitcoin network can handle about 5 - 7 transactions per second (TPS). You can compare this to about 1,500 to 2,000 TPS of Visa. Bitcoin needs to be able to process a large number of transactions quickly in order to be used as a means of exchange (i.e., as money in everyday transactions). In contrast to Visa or American Express, the bitcoin network can only handle a relatively modest number of transactions by design. The network gets crowded as more individuals use bitcoin, lengthening transaction times and raising fees.
Introducing the Lightning Network. A parallel network called Lightning is built on top of the bitcoin blockchain. This is the concept of Layer 2 that we explained in a previous article here. The Lightning Network is a system of payment channels that enables almost instantaneous, inexpensive bitcoin transactions. Users can send and receive bitcoin via the Lightning Network without having to wait for blockchain confirmations. As a result, transactions can be finished immediately as opposed to taking minutes or hours.
Joseph Poon and Thaddeus Dryja drafted the Lightning Network white paper in 2016, and it has been in active development ever since.
Payment channels can be established on the Bitcoin network thanks to the Lightning Network. You can think of these channels as a means for two users to transact with one another ad infinitum without having to wait for block confirmation on the blockchain because they are off the main bitcoin blockchain.
You might be wondering why this is even required, and the answer was given at the beginning: only 7 TPS. This is nowhere near scalable, when you compare it to a credit card network which gets used in everyday life, in everyday transactions. Actually then, why can the bitcoin network only process about 7 TPS? That’s a question for an entire article itself, but let’s do a very high level overview:
Every transaction that takes place is broadcast to all network nodes.
Because of network congestion, only users who have paid the highest rates are validated.
Ten minutes are required for block validation according to the Bitcoin network protocol.
Payment channels in the Lightning Network allow users to engage in as many transactions as they like with one another and can end a payment channel at any time. This is similar to “opening a tab” at a bar where all your drinks (in this case transactions) will be tallied and you pay for the drinks at the end. Only the initial (financing) transaction and the closing (settlement) transaction are the sole transactions that are added to the Layer 1 bitcoin blockchain.
Using the Lightning Network for Bitcoin network transactions has a number of advantages, such as:
more rapid transactions.
reduced transaction costs.
a greater capacity to scale.
While it’s too early to say whether the Lightning Network is the definitive solution to bitcoin’s scalability problem, it does illustrate one example of the many communities and teams hard at work trying to create new solutions to enhance bitcoin’s ease of use.