A lack of consensus over how Bitcoin should be scaled has led to increased concern about its future and even a complete loss of faith for some former developers. However, the engineers who have studied and are working on an upcoming upgrade, the Lightning Network, seem unfazed.

Lightning Network Basics

The Lightning Network will bring to Bitcoin off-chain transactions that can be sent at rapid speeds because they aren’t recorded on the blockchain. Developers claim it will “easily do millions of transactions per second capacity vs. Visa’s 40,000,” and have fees of effectively zero.

The core building blocks of the network are payment channels opened between users which allow funds to be sent back and forth instantaneously until one party closes the channel. Channels are opened by temporarily locking up Bitcoin and can be funded by a single party (one-way) or both parties (two-way). Opening and closing channels are the only Lightning Network actions which require broadcasting a transaction to the blockchain. To pay each other, the parties simply update their mutual balance.

Eventually, a vast network of payment channels will form and any two Lightning Network users will be 2–7 hops away from each other. A direct link won’t be needed to make instant payments to anyone else using Lightning, just a path to hop through multiple channels. Channel owners will set and collect fees for routing payments.

The more bitcoin you’ve committed to a payment channel, the more transactions and fees you can collect. This is balanced by the costs of temporarily “locking up” Bitcoin in terms of liquidity and exposing them in terms of private key security. The Lightning Network will allow Bitcoin to easily support:

Native micropayments

Instant payments

Value transfer across separate blockchains such as Ethereum’s.

Developers are building a Lightning Network client that will abstract away the complexity of payment routing and may provide a more user friendly experience than the current Bitcoin Core wallet.

Potential Issues

Most criticisms I’ve seen have been economic, legal and game-theoretic predictions, not declarations that the solution is technically impossible.

Potential graph structures

The Lightning Network will end up with a centralized graph structure dominated by a few large hubs. High capital requirements act as a disincentive to running a large hub. Unlike Bitcoin mining, no specialized equipment is needed to run a Lightning hub, so low barriers to entry and high competition should keep the graph less centralized in the long term. “We envision the network to be like that of the internet — a scale-free network,” said Lightning CEO/Co-founder Elizabeth Stark. Lightning hubs will be regulated under money transmission laws. This would be technically difficult and seems unlikely considering Bitcoin miners aren’t regulated as transmitters. Any legislation is probably years away, would be limited to hubs of certain sizes, and vary from country to country. It will be difficult to balance the desire to maintain user privacy with the need to measure graph structure. The Lightning Network won’t be deployed in time to avert imminent disaster. Blocks are already too full, the nascent fee market is crippling Bitcoin. There’s a good chance we’ll see a basic Lightning Network implementation up by the end of Summer. A collapse of Bitcoin before then doesn’t seem realistic. The Lightning Network will be controlled by Blockstream who is crippling Bitcoin so that they can profit by controlling a large Lightning hub. Lightning Network is an open source project and if it works as planned, there will be no mechanism by which Blockstream could easily establish a dominant hub, should they choose to run one. A centralized Lightning Network would hurt Bitcoin and Blockstream, a startup whose success depends on Bitcoin’s mainstream adoption. Lightning, ACINQ, Blockchain, BitMain,and Amiko Pay are independently developing implementations of the network.

The Road Ahead

A recent release on Bitcoin’s test network features support for Lightning Network payments and a tech demonstration was recently uploaded. The most recent version of Bitcoin Core contains several features necessary for the deployment of Lightning. With the addition of other upgrades (Sidechains, Segregated Witness, Schnorr Signatures, an increased block size), Bitcoin’s transaction capacity, privacy, and smart contracting capabilities could radically improve over the next year.

Cooperation on building a robust Lightning Network may represent an opportunity for industry leaders who have been fighting over the block size issue to mend some fences.

Thank you to the Lightning Network developers and Slack channel members who provided technical advice on this piece.