Bitcoin was originally designed as a peer-to-peer electronic cash system, but its potential as an expanding asset ended up superseding its original purpose. In a peer-to-peer electronic cash system, online payments are sent directly from one person to another without using a bank or another financial institution as an intermediate.

Bitcoin Has A Scalability Problem

One reason that Bitcoin has had trouble taking off as a payment method is that the popular cryptocurrency has a scalability problem. The current block size of 1MB is too small to manage the large amounts of transactions taking place on the Bitcoin network. The insufficient size of the block limits the number of transactions that the network can process. Consequently, transactions are written to the blockchain at a rate that is much slower than the rate users are creating the transactions. Over time, this leads to backlog. In mid-November, the digital currency had a backlog of more than 135,000 unconfirmed transactions.

Could a Lightning Network be the solution?

People have been experimenting with ways to enable Bitcoin to more effectively perform its original purpose. One proposed solution focuses on lightning networks. The hope is that a lightning network would greatly reduce the volume of transactions miners have to process.

On a lightning network, only the final results of transactions between peers is recorded, rather than every single transaction. This distinction would allow for transactions to be confirmed immediately. Users would no longer have to wait weeks to have their transactions validated. Litecoin is currently undergoing a test-run for a lightning network.

Transaction fees are another problem. Someone willing to spend million on luxury items, such as cars and art, will more readily pay a $20 transaction fee. But most people don’t want to pay a high transaction fee when they’re buying food and other small, daily purchases. A lightning network could also reduce transaction fees by making the transaction process more efficient.