Over the past year the Bitcoin community has been divided over the blocksize debate. The amount of data that can be stored on a single block is 1 mb. This translates to around 3 transactions per second, which is 259,200 transactions a day. Compare that to the 15 millions transactions processed by credit cards on a daily basis and we can see why people are concerned about scaling Bitcoin.
Bitcoin in its current state works well for a niche community but doesn’t scale to meet the demands of a large global payment network. The Bitcoin developers are working on scaling the blockchain with a concept called Lightning Network.
What is Lightning Network?
Lightning Network is a way to create payment smart contracts on top of the blockchain. Users can lock coins on the blockchain and create payment hubs between multiple parties. The best analogy I’ve heard regarding this is opening up a bar tab and settling at the end of the night instead of paying for each drink separately.
These payment hubs have the potential to scale millions of transactions per second and don’t require trust in a third party. Read this post for a more detailed explanation of Lightning Network.
Decentralized Exchanges
Cryptocurrencies are one of the most profitable markets to trade. The main problem with trading crypto is that users are generally required to send their coins to an exchange and trust a third party to manage their private keys. People have lost millions of dollars from exchanges getting hacked or stealing their funds.
Lightning Network has the potential to solve this problem through its trustless payment hubs. Imagine using a hot wallet exchange like Coinbase except you never relinquish control over your private keys. As this technology evolves I foresee the ability to efficiently trade derivatives on top of the blockchain.
Criticism of Lightning Network
There have been some valid concerns around Lightning Network. Anyone will be able to create a payment hub but this requires locking up funds to provide liquidity. Naturally, some payment hubs will become popular as a result of providing more liquidity. This has the potential to centralize bitcoin transactions to a few large companies.
Regulators could see this as providing a money service and may even demand that these hubs become licensed. What if the regulators start asking hubs to be KYC compliant or blacklist certain coins?
Bitcoin’s greatest feature is its decentralization and its ability to be censorship free money.
Potential Impact on the Markets
Scaling Bitcoin to handle millions of transactions will likely have a bullish effect on the price. A boost in user adoption will increase buying pressure on the limited supply of coins in circulation. Companies may start using Bitcoin as a public settlement network, which provides more utility as a trustless system than private blockchains.
Safeguards Against Centralization
Bitcoin by nature is designed to be resilient to centralization. Let’s entertain the scenario where a group of bankers successfully manage to hijack Bitcoin. Well, it’s open source software which means anyone can run their own version or create an altcoin. There are thousands of cryptocurrencies to choose from and it’s not possible to control them all.
Bitcoin is also based on a consensus model which means miners can vote with their hashing power on which version they want to use. In the event that Lightning Network becomes a centralized disaster, miners could fork the network to a more suitable version of Bitcoin.
Technology is continuously evolving and as long as Bitcoin remains decentralized any improvements to the protocol will likely add to its longevity as a payment system.