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With the impending switch from proof-of-work to a more energy-efficient proof-of-stake model, Ethereum will be able to reduce its impact on the environment significantly. This move is known as 'The Merge,' and it will be implemented soon. ETH 2.0 will also solve some of the scalability issues, primarily by implementing sharding techniques. However, in order to attain higher degrees of scalability, layer 2 scaling methods are required. Layer 2 solutions aim to increase Ethereum's scalability by building on top of it rather than from within the blockchain itself. Separate blockchains, known as sidechains, run concurrently with Ethereum Mainnet but independently. For the most part, sidechains do not rely on the security of the main blockchain, and they have their own consensus process in place. As a result of a separate chain existing in parallel to the main chain, a lot of the workload can be migrated to the sidechain, resulting in significantly faster transaction speeds.
But What's All This Got to Do With Bitcoin?
Simply said, sidechains are also a boon for Bitcoin, which has been plagued and critiqued due to its scalability issues. However, due to a slight difference in the terminology, people often get confused. The layer 2 scaling solution is commonly referred to as the Lightning Network when it comes to Bitcoin. The lightning network adds a second layer to the Bitcoin blockchain to enable off-chain transactions. The second layer consists of multiple payment channels established between parties or Bitcoin (BTC) users. A lightning network channel lets two people send and receive money. Layer two enhances the scalability of blockchain applications by managing transactions outside of the blockchain mainnet (layer one) while still benefiting from the mainnet's powerful decentralized security paradigm. The lack of scalability is a significant barrier to the widespread adoption of cryptocurrencies. When properly scaled, a blockchain network may process millions to billions of transactions per second (TPS). In this context, the lightning network charges low fees by transacting and settling off-chain, enabling new use cases such as instant micropayments, which can solve the traditional "can you buy coffee with cryptocurrency" predicament by significantly reducing processing times and lowering the costs (energy costs) affiliated with the Bitcoin blockchain. In short, the lightning network helps Bitcoin with-
- Increased Speed
- Reduced fees
- Overall Scalability boost
While the intent is admirable, the lightning network is still failing to address the issue and has even brought new problems such as low routing prices and malicious attacks. There is a small fee to set up and terminate a payment channel, for example. Additional fees are paid to nodes that verify transactions in addition to these minor charges. The question now is, why would a node want to validate a transaction with such a low routing fee? The reasonable explanation is that miners do not usually validate smaller transactions since they get lower fees for doing so. As a result, traders are required to pay a routing fee, and their transactions may take a long time to be verified. In terms of destructive attacks, a bad actor may set up several payment channels and then shut them all at once. Those channels must then be authenticated, causing traffic load by getting in the way of genuine transactions. During periods of high traffic, the attacker may be able to take money away before legitimate parties become aware of the problem. The beauty of the Lightning Network, however, is that these updated bitcoin transactions do not have to be broadcasted to the blockchain; thus, they do not use block space or require miner fees. However, the updated transaction still have value since they can be included in the Bitcoin blockchain. It's also possible for users to swap between networks, using Lightning Network for smaller transactions and the Bitcoin network for major ones. Last but not the least, the Lightning Network's transactions are private, taking place outside of the blockchain and only capturing the aggregated outcomes of the transaction. As the number of nodes and channels on the Bitcoin network rises, so does the network's ability to process more bitcoin transactions. The Lightning Network may be the key to solving the scalability problem in Bitcoin in the future. More individuals are using both Bitcoin and the Lightning Network because they operate so well together. If you're already using Bitcoin, the Lightning Network is a no-brainer for making fast, low-cost payments. As more individuals utilize Lightning Network and Bitcoin, both will be recognized on conventional exchanges and accepted as traditional means of payment.
Closing Note
The Lightning Network, which was launched in 2018, is quickly transforming the face of Bitcoin. Developers worked extensively to sustain and promote the network and build a user-friendly platform. A smartphone is all it takes to connect to the Lightning Network, allowing anybody to send and receive payments with limitless options. While the Lightning Network is currently a work in progress, it has the potential to benefit both the Bitcoin network and its users.