Blockchain is the race to Mars in search of scalable solutions. Bitcoin processes seven transactions per second. On average, 400 transactions per minute, while Visa processes between 1000 and 4000 transactions per second. Unfortunately, Bitcoin’s chances in that race have been limited by scalability until now. Meet the Lightning Network, which has made the battle between Visa & Bitcoin an actual horse race. But before the good news, we need to remember Bitcoin’s bad news in this speed trial.
Blockchain Scalability is a Major Roadblock
According to Deloitte Insights, “blockchain-based systems can be slow.” Enterprises that rely on legacy transaction processing systems are concerned about Blockchain’s slow transaction speeds. This was evident in 2017 and 2018.
Tata Communications 2018 study found that 44% of respondents use Blockchain. However, it also points out the many problems associated with deploying new technologies. The unsolved problem of scalability, which is a barrier to the adoption of Blockchain and its practical applications, is an architectural issue. To scale a blockchain, it is though you need to increase the block size or decrease the block time by decreasing the hash complexity. Either way, the scale of a blockchain will reach a limit before it can compete with businesses such as VISA.
Bitcoin transaction speeds are much slower than those of other currencies. The block size currently is 1MB (1.048,576 bytes). The average transaction size of 380.04 bytes. This assumes that each transaction is one to x wallets so that a batch transaction would be one transaction. To grow from Bitcoin’s seven transactions per second to Visa’s average of 1736 TPS, Bitcoin must increase its TPS by 377.5x. This also means the block size must be increased from 1MB up to 377.5MB, or block time should be decreased from ten minutes to 1.6 seconds.
Increasing the block size or decreasing the block time is not an option mainly due to one factor: The relay time required to broadcast a new Bitcoin block to each node on the network is a significant factor.
There are currently 10,198 Bitcoin network nodes. It takes time to transmit 1MB (1.048,576 bytes) through the peer-to-peer network. The Karlsruhe Institute of Technology measured Bitcoin’s block propagation times. On January 17, 2019, the average block propagation speed was 13,989.42 milliseconds. This means that it took approximately 14 seconds for Bitcoin to spread to 99% of the network.
Block time must not fall below 99% of relay time because a new block will be generated and received by the majority of the other nodes in the network. As Block time approaches the relay time, more problems arise, such as forks, chain reorganizations and orphan blocks. In extreme cases, security vulnerabilities like double-spend attacks can also be present.
By increasing the block size (from 1MB to 2MB), the time required for each node to download a new block would increase by approximately two times. At 2MB, the block relay time for 99% of the nodes would be about 28 seconds. To reduce the impact of block relaying, one solution is to increase the bandwidth between all the nodes in the Bitcoin network. Because this is a P2P network that relies on peer-to-peer transactions, this responsibility falls on each peer. It should also be remembered that Bitcoin has to operate under conflicting conditions. This means that it must be able to operate where bandwidth is scarce and must also be able to be routed through TOR and VPNs.
Therefore, it is becoming increasingly evident that the block size debate is a thing of the past. With Bitcoin’s importance today, it would already be impossible to support the Blockchain in a decentralized way with a slight increase in block size. It is unlikely that the near future will allow the transmission of 377MB blocks in a decentralized fashion every 10 minutes. Therefore, a better solution is needed to make it a payment system suitable against credit card networks.
Enter Lightning Network
The Lightning Network is a decentralized protocol built independently from the Bitcoin blockchain and layered onto the Blockchain. It allows for micropayments of Bitcoin via peer-to-peer networking without broadcasting to the Blockchain. It will enable fast, bidirectional transactions between participants without the need of a custodian and is being viewed by many as the solution for Bitcoin’s scaling problem.
Bitcoin is a first-layer network. This means it can manage multiple digital layers pegged to its Blockchain. Lightning Network, one of these digital layers, is, i.e. A second-layer protocol that interacts with the Bitcoin blockchain to improve its performance (in our case, speed and affordability). Bitcoin is a permissionless network. This means that payments are not subject to authorization. Full nodes verify the validity of payments. Lightning does not require authorizations directly from the Blockchain for off-chain micropayments. Instead it uses the Blockchain for settlements between channels.
The Lightning Network will blow VISA’s TPS out of the water. Lightning can process millions to billions of transactions per second. Although there is no way to know the exact speed of transactions, Lightning’s decentralized structure will be able to process payments much faster than VISA once the complicated blockchain processes that Bitcoin uses are replaced.
Lightning’s decentralization and VISA’s network effects
VISA’s user base is just over 1.14 Billion people around the world. Lightning, which uses the number of unique channels to measure its size, has only 59,745 users on its public channels (August 2021). VISA remains the most popular payment network to this day. But how did VISA get to this point? It was prompted to expand its network in response to the increasing number of users. It was more widely adopted the quicker it attracted new users, and it attracted more users the faster the network operated. The network effect is a self-fulfilling prophecy.
Lightning channels are an extensive network of mini-networks that allow users to transact with one another. Lightning does not require the VISA-sized payment infrastructure. Users machines are decentralized, so Lightning isn’t dependent on large-scale infrastructure. This is Lightning’s essence. It’s also a great solution to Bitcoin’s on-chain current delays. Lightning’s greatest innovation is its ability to allow users to make micropayments directly from their computer or cellphone without needing to wait for confirmations from the Bitcoin blockchain.
What’s the equivalent for VISA? The closest thing is pre-authorization. The first is that the cardholder’s credit limit determines the maximum amount a user may spend. You can, however, open a tab at a bar and set a limit that allows partial authorization payments. Once the tab is closed, it will become fully authorized.
We cannot yet conclude in a precise and scientific way that Bitcoin’s Lightning network does indeed have a current payment capacity of 40 million TPS, simply because there is not such a large volume of transactions to try. However, the data shows that the Lightning Network is rapidly gaining popularity. A country like El Salvador is essentially added in transaction volume without feeling stress at the blockchain level, which certainly bodes well for the success of the Lightning Network. Either way, it seems obvious that scaling will not be done by increasing block sizes but by compressing the main Blockchain transactions. Regardless, the future of Bitcoin and the Lightning Network looks bright and has real potential to be the world’s largest and most successful monetary system and payment network.