Am I the only one who hates the phrase “off-chain scaling”? I guess my reaction when I hear that phrase is, well yeah, of course Bitcoin can "scale" off-chain. If you want to scale to “VISA levels,” and you're willing to do it off-chain, it can be pretty simple. Take the existing VISA infrastructure (or recreate it) and, instead of using it to process fiat-denominated IOUs, use it to process Bitcoin-denominated IOUs. Now obviously the “Bitcoin as settlement network” camp will say: “hey, that’s not fair! We’re not talking about simply recreating the custodial, trust-based credit and banking models of the fiat world in Bitcoin. We're talking about the Lightning Network which uses crypto-magic to enable off-chain transactions while still avoiding centralization and custodial risk. Lightning transactions are Bitcoin transactions.”



Well, no. They’re not. I’m far from an expert on the Lightning Network, but as I understand it, the proposal involves the repeated exchange of unconfirmed, unbroadcast Bitcoin transactions, i.e. potential Bitcoin transactions. Now there are some people who are very excited about the LN’s potential, and there are others who are very skeptical. But for purposes of the point I’m making it doesn’t really matter who’s right. I have no doubt that Bitcoin, by its very nature as an open, extensible network, enables the creation of some really novel, really useful “layer two” solutions (whether or not the LN proves to be one of them). But the fact remains: when you move transactions to a “layer two” solution, you have – by definition – added a layer of risk. Your layer two solution might be really, really great and a huge improvement over the traditional banking model such that the added layer of risk is relatively thin. And that’s awesome… but it’s still there. So you can’t just say: “who cares if Bitcoin’s layer one is artificially crippled? We’ll just move everything to layer two.” To the extent that on-chain scaling is artificially restricted (rather than being constrained only by technological limits), there is going to be an unavoidable deadweight loss. And all that can do is open the door for Bitcoin’s competitors.



Also, it seems to me that if there were no downside to using a “layer two” solution to make a particular payment, if it were really true that “Lightning transactions have the full security of on chain transactions” (as I saw one redditor claim), that would be a very dangerous state of affairs. If everyone could get all of the benefits of an on-blockchain transaction without actually using the blockchain (and thus paying the fees to secure it), that would seem to create a tragedy of the commons.