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Bitcoin Technology

The Bitcoin Lightning Network Upgrade Explained

By February 15, 2018 February 12th, 2019 No Comments

What is the Bitcoin Lightning Network?

The Bitcoin Lightning Network is an incredible solution to solve Bitcoins scaling problem. Using payment channels, millions of transactions can occur at virtually zero fees. Its also infinitely scalable, and has been likened to the internets upgrade to TCP/IP.

The development of the Bitcoin Lightning Network upgrade is quite possibly the most pivotal moment in Bitcoins history. But what does this innovative Bitcoin Technology upgrade mean, and why is it needed? Can Bitcoin survive without it, or is it doomed if it implements it?

Why Bitcoin Needs the Lightning Network

Lets provide some context around why the Bitcoin Lightning Network is needed. During the later parts of 2017, Bitcoin rapidly became more and more popular as people around the world learnt about it, bought some, and used it as an alternative to traditional fiat currency. Unfortunately, Bitcoins network became congested, slowing down transactions while equally making it very expensive to use.

Bitcoins average transaction fees reached a high of $55 USD per transaction, before starting to reduce leading into February of 2018. This price increase also coincided with a massive increase in the volume of transactions.  Basically more and more people were buying Bitcoin, and sending it to a wallet. We also saw Bitcoins Block size filling up close to 1MB , which is its upper limit.

The slow transaction times

In addition to Bitcoins high fees during the December peaks, were the awfully slow transaction times.

During December 2017, there was a median transaction confirmation time of around 1.7 hours, and an average of 4.7 hours. In January 2018, the median time was 3 hours, with an average of 16.5 hours for a single transaction.

Image of Bitcoins high transaction times during December showing why the Bitcoin Lightning Network is needed

During these few months of heavy traffic, Bitcoin became virtually too expensive to use, with transaction times too slow to be practical. Its use-case a decentralised peer-2-peer currency evaporated.

Why did these issues arise?

The way Bitcoin works is, the sender of some bitcoin gets to choose how high they want to set the transaction fee (so long as they are using a wallet they allows this). The higher the fee, the higher in the priority list the transaction gets, meaning it has a higher chance of getting confirmed faster. This is called ‘Market for Block Space‘, and is based on some very clever coding.

The actual price of the fees themselves are based on supply and demand in Bitcoins protocol design of a free market for block space. This is where things get a little technical.

Bitcoin has a maximum block size of 1 megabyte, with transactions being the data that fills these blocks until the block is confirmed by a miner.

Image of the blocksize filling up since Bitcoins inception, showing why the Bitcoin Lightning Network is neededAs Bitcoin has grown in popularity over the years, the blocks are filling up. Around mid-2017 is when blocks started to fill up for the first time ever. In addition, Bitcoin is designed to have miners confirm 1 block every 10 minutes, further  exacerbating the issue.

Bitcoins design constraints

Bitcoins architecture design currently has two constraints on it, one being block sizes of 1 megabyte, and the other being the 10 minute confirmation time. When transactions increase at a rate beyond these constraints, the transactions in the mempool (basically a waiting list of transactions) increases. This is when Bitcoin becomes too expensive and too slow to become practical as an alternative currency.

Image of Bitcoins mempool during the past year, showing how the Bitcoin Lightning Network can relieve transactionsSo this leaves Bitcoin with a major issue. If this immutable and distributed cryptocurrency is ever going to be used by millions of people one day, how can that happen with high fees and slow transactions?

The early Bitcoin scaling debate

The first option was to increase the block size of Bitcoin. This would allow more transactions to be captured and confirmed. The other option was to increase the block confirmation time.

This issue has been raised and discussed since as early as 2013 on old Bitcointalk forums. Discussions ensued between former Bitcoin Core Developers Gavin Andresen and Peter Todd, on whether increasing the Block size limit was the right way to do it.

Image of Gavin Andresen raising the Bitcoin Blocksize debate as far back as 2013

These early discussions indicated that there was some serious disagreement between developers on how to scale Bitcoin. Arguments were made against raising the block size limit due to an increase in hardware requirements that would be required in several years. One was a super-high speed internet connections would be needed, and the other was significant hard drive space. Because Bitcoins blockchain size would exponentially increase, it could have potentially lead to centralization of mining pools as they would have the resources for the internet and hard drives needed.

Bitcoin Improvement Proposal 101

Fast forward a couple of years to July 2015, when Bitcoin Improvement Proposal 101 was submitted by developer Gavin Andresen. The proposal sought to lift the 1 megabyte cap on Bitcoins block size limit, and to replace it with a size that would grow over time according to a predictable rate.

The first increase was proposed to be 8 megabytes in January 2016. It would then double in size approximately every 2 years, capping at 8.2 gigabytes in the year 2036.

Objections to BIP101

Objections to the proposal included the centralization of full nodes and mining, as the internet bandwidth and disk space requirements would significantly increase over time, due to the aforementioned requirement of more expensive hardware and internet speeds.

Others included the centralization of mining in the form of big-block attacks. Simulations indicated that larger blocks actually gave an advantage to miners with high bandwidth connections.

BIP101 was subsequently withdrawn. Following the withdrawal, several more Bitcoin Improvement Proposals were made to increase the block size limit from various developers, all of which were either kept in draft, or were rejected.

Image of Bitcoin Github repository that showed other block size limit increase proposals prior to the Bitcoin Lightning Network

The other issue relating to 10 minute block confirmation times never really got major support to be changed. This feature of Bitcoin was seen as integral to retain the security of Bitcoins network, and to keep it as decentralised as possible.

Bitcoin and Segregated Witness

This brings us to the proposal and subsequent implementation of Segregated Witness, which was finalised in Bitcoin Improvement Proposal 148 in early 2017.

Segregated Witness, or more commonly termed ‘SegWit’, was proposed as a UASF, which stands for user-activated-soft-fork. This upgrade was a precursor upgrade required for the Bitcoin Lightning Network, and saw opposition from miners in its early days.

A soft-fork is a backwards compatible upgrade to Bitcoins network, which can also be used correct accidental hard-forks

Segwit proposed a number of features to Bitcoin under something called ‘Malleability Fixes’. These fixes would be the stepping stone for future upgrades to Bitcoin, but most importantly, would facilitate the implementation of the Bitcoin Lightning Network.

To overcome the miners opposition, the UASF was deployed. This allowed nodes, who are the economic majority in Bitcoins consensus rules, to accept the upgrade despite the miners opposition. The miners subsequently agreed to the implementation and Segwit was successfully activated around August 2017.

The Bitcoin Lightning Network

So, what is the Bitcoin Lightning Network then? The Lightning Network primarily works using something called payment channels. Instead of every transaction, big or small, being broadcast to the Bitcoin network, the system allows for transfers of value to occur ‘off-chain’. The Lightning Network acts as a ‘second layer’ which runs on top of the Bitcoins base blockchain layer.

What does this mean? Once fully implemented, Bitcoin will be capable of performing instantaneous transactions without the requirement for a block confirmation. It also means that micropayments will become possible, allowing payments as low as 1/10,000,000th of a Bitcoin to be spent with virtually zero fees. And lastly, the Lightning Network will allow Bitcoin to mass scale to virtually unlimited size in the years to come.

How the Internet had to scale

The Lightning Network upgrade has been compared to how the internet had to scale. When a transaction occurs on Bitcoin, no matter how big or small, it is broadcast to all connected nodes on the network.

Image of diagram showing a broadcast data type, where data is transferred to all recipients on a network

Image source; https://medium.com/@melik_87377

This is analogous to how the internet used to function, where Ethernet hubs had to transfer data between computers. The data would be broadcast and replicated  through all other interfaces (or ports), on the network.

This greatly limited the internet from mass scaling, as it became infeasible to broadcast data transmissions to every participant on the network. Network engineers overcame this issue by developing unicast data transmissions, where data was able to be routed from the source to its destination, without having to be replicated to every participant.

Image of diagram showing a unicast style of data transmission, analogous to how the Bitcoin Lightning Network will operate

Image source; https://medium.com/@melik_87377

Lightning Network similarities to Internet scaling

The Bitcoin Lightning Network and its payment channels is being compared to the internets unicast, where nodes will be able to route point-to-point transactions without having to replicate the transaction on every node on the network. So essentially, the lightning network is being compared to the internet’s TCP/IP, allowing global scalability.

It seems the Bitcoin Lightning Network sounds like the ultimate solution to Bitcoins long term scaling issue, but there have been major objections. Bitcoin Cash was created on August 2017 by hard forking the Bitcoin Blockchain. This was first announced by Bitmain who initially called it a contingency against BIP148.

Bitcoin Cash is born

Image of Bitcoin Cash Logo, which was born out of opposition to the Bitcoin Lightning Network proposal

Bitcoin Cash is the result of a fork Bitcoins blockchain, essentially creating a copy of Bitcoins protocol but with underlying changes. Alternative parameters were implemented, such as an adjustable block size limit, with the minimum being raised to 8 megabytes. In a nutshell, Bitcoin Cash decided to keep all future transactions on the blockchain ledger without adopting any second layer off-chain scaling.

Image of the Bitcoin Cash Fork, showing Bitcoin in the orange remaining on the original segwit chain for the Bitcoin Lightning Network

The creation of Bitcoin Cash and Bitcoin has created a deep divide between Bitcoin developers, users, and the community. Conspiracies run deep on both sides as to intentions, agendas and how Bitcoin should be handled and scaled. The fact that Bitcoin is so open source and decentralised is largely the reason for this, but that’s also what makes it so strong, and so resilient.

Where is the Bitcoin Lightning Network up to now?

By early December 2017, the Bitcoin Lightning Network mainnet testing began after successful trials on the testnet. As of late December 2017, developers and enthusiasts alike could start testing the Lightning Network themselves.

Now just several months since the mainnet opened for testing, the number of nodes running the Lightning Network has started to drastically increase. The live Bitcoin Lightning Network is growing with nodes and payment channels by the day.

Image of Bitcoin Lightning Network visualisation, showing all the connected nodes on the network

The largest cryptocurrency exchange in the world, CoinBase, implemented segwit back in February 2018. This means at some point, the Bitcoin Lightning Network can be implemented and used via a CoinBase payment channel.

With the number of nodes running the Lightning Network increasing every day, and general sentiment become more and more positive for Bitcoins future, its just a matter of time before this upgrade starts being implemented around the world.

Bitcoins purpose, to be an alternative medium of exchange and store of value, will return and will provide amazing utility to its users, allowing instantaneous and very low fee transactions, whilst being ready for global adoption and scalability.

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