My opinion on Lightning Network: A leap forward for the Bitcoin network

About three weeks ago, I wrote a post titled “The Lightning Network is great, but it has all kinds of problems” which generated a lot of discussion. The purpose of that post was to make my point that while the Lightning Network technology is great, it is not some magic bullet that will solve all of Bitcoin’s scaling problems.

I still think so, but the tone of that post was a bit negative, and that negative tone has since become a negative feedback loop on /r/btc/. I spent so much time on the negative aspects of the Lightning Network that I may have overlooked the positive aspects. This post will focus on the positive aspects of the Lightning Network and offer some new ideas that can help us move forward.

Last week, I was interviewed by the “Let’s Talk Bitcoin” podcast about the Lightning Network. I tried to stay positive throughout the interview. I pointed out that Bitcoin evangelist Andreas Antonopoulos was very optimistic and had a big picture perspective.

Andreas has said more than once that even if Bitcoin fails, it won’t have much of an impact on the “big picture.” You can’t “kill” all digital currencies. The short-term political or technical struggles Bitcoin faces right now pale in comparison to where the cryptocurrency revolution will ultimately go. Like many others, I not only support Bitcoin emotionally and intellectually, but I’m also financially invested in it. On the other hand, because I’m personally invested in Bitcoin, many of my opinions are inevitably colored. I want Bitcoin to succeed, not Litecoin, Dogecoin, or any other cryptocurrency. I’m betting on Bitcoin, and naturally I want it to succeed in the long run.

As the quote above purportedly attributed to Teddy Roosevelt said, "Complaining about problems without offering solutions is called whining." I take this as a wake-up call. Instead of focusing on the negative, do your part to find solutions. That is the purpose of today's post, and I hope you will do the same. This is a path forward that will enable almost anyone who invests in the Bitcoin ecosystem to achieve their goals. This path is not smooth, and there are no guarantees. But at least it is a solution, and there is a clear common goal we can work towards.

So, first, let’s look at these common goals and then figure out if there are ways to achieve them.

Bitcoin Goals:

• Bitcoin should remain decentralized and not be oppressed by any central authority. This is the most critical and important property of Bitcoin. If lost, other properties of Bitcoin will become irrelevant.

•Bitcoin should be a store of value available to everyone on the planet.

•Bitcoin should be used as a safe store of value and, under normal circumstances, continue to appreciate in value.

•Bitcoin should scale to accommodate more users and more payment transactions, as this would benefit Bitcoin’s other desirable properties.

•Bitcoin should be able to be traded not only between people but also between machines, and should be able to support small transactions at almost no cost.

The above points are agreed upon by most Bitcoin supporters, but the question now is how to achieve them?

In short: through the network layer. Today, when we mention "Bitcoin" (in a technical sense), most people think of the Bitcoin network and blockchain. For now, Bitcoin is indeed like this, but in the long run, Bitcoin is more than just the Bitcoin network and blockchain.

未来的比特币网络将由一层叠着一层的网络组成，就像是俄罗斯套娃。 Almost all networks are built this way. Each layer is usually designed to focus on one thing. If you try to design a single layer network and want it to do everything, it will usually be a mess of functionality and will not fully achieve its goals.

It’s important to understand that every time you add a layer to the network, you’re not creating something separate from Bitcoin, you’re expanding the definition of Bitcoin. All combined layers are still part of the overall Bitcoin ecosystem.

In the future, the core Bitcoin network and blockchain we see today will be the bottom layer of the entire Bitcoin network. Although the Bitcoin network is limited, each network layer on the Bitcoin network can reduce or eliminate these limitations.

That’s what we’re going to do over the next few years. But if we become impatient and try to fundamentally change the core Bitcoin protocol to make it a “one size fits all” network layer, then that would be killing the goose that lays the golden eggs. I don’t think anyone wants that to happen.

The core Bitcoin network will never allow us to scale Bitcoin to hundreds of millions of people directly without losing the important properties of censorship resistance and non-state control. However, we can scale this up by adding additional network layers.

The Bitcoin network won’t do this alone. The Lightning Network won’t do this alone. Sidechains won’t do this alone. But if these networks are combined in an expanded and carefully planned approach, they can achieve these goals.

When you hear how it’s done technically, it can sound overwhelming. There is no other way around it. The Bitcoin network is complex enough that it requires a decent computer science background to understand. When you add sidechains, smart contracts, and other advanced cryptography and network topologies to the Bitcoin network, the barrier to entry is raised. This should not be seen as a problem or a negative. All around the world, new large software projects are being written and deployed all the time. We are doing some amazing work in the field of AI and neural networks; from self-driving cars to computers that can create art.

The fact that the software developed to do these things is complex is not a difficulty, but a challenge to be faced. Behind those cool software are the hard work of many engineers for a long time. In the end, no matter how complicated it is, once they produce their products, these products can change the world.

Next, let’s start by talking about what the Bitcoin network does well and what it doesn’t do well enough.

•The Bitcoin network is brilliant, providing a distributed, censorship-resistant way to store and transfer value around the world without the need for a third party. It is a truly great invention.

• Payment fees on the Bitcoin network are not low enough, especially for payments that require instant confirmation.

•The Bitcoin network does not scale well to large numbers of active users on the chain.

The Bitcoin network maintains an immutable database called the "blockchain" that records every transaction in its history. Maintaining this distributed and censorship-resistant database is not free, it has real-world fixed costs and attempts to include current risks in the network's most important features - decentralization and censorship resistance. Over the years, many malicious attacks have occurred on the network, and now the network is full of spam transactions left by attackers trying to disrupt the system. Each of these malicious spam transactions is recorded on the blockchain, and all the times of occurrence are recorded forever. Every transaction that Satoshi Dice has ever made is recorded on the blockchain for everyone to see.

Intuitively, this makes almost no sense to anyone. Why should every tiny transaction (worth as little as one millionth of a penny) be recorded forever on the blockchain? If the blockchain were free, perhaps this wouldn’t be a problem. But the blockchain is not free. It’s an ever-growing network resource, and the larger it grows, the harder it is to remain fully decentralized.

Fortunately, the solution to this problem is something called the Lightning Network. The Lightning Network is able to offload all low-value transactions from a blockchain (any blockchain with sufficient cryptographic power). Not only does it offload low-value transactions, but it enables new features that the Bitcoin Core blockchain will never be able to achieve. It can provide instant fraud-proof confirmations. It can support small transactions of unlimited value, and it does so for virtually no cost.

The Lightning Network is not and should not be considered something separate from the Bitcoin network. It is simply a further development of the Bitcoin network that can expand and enhance the entire Bitcoin ecosystem.

As pointed out in previous posts, the Lightning Network is not magic (a miracle solution). It does not solve all problems. It is just able to easily offload a large number of everyday low-value payment transactions; these transactions are the majority of all transactions on any payment network, but definitely not all. High-value transactions and transactions required to open or close payment channels are still determined by the core Bitcoin block size.

So, what can we do?

There is one answer, which is equivalent to another piece of the puzzle, which is the concept called "side chain". So, what is "side chain"? "Side chain" is another kind of blockchain, which has its own value compared to the main chain of Bitcoin blockchain.

Sidechains are almost identical to existing “altcoins”, but with one key difference: the value represented on the sidechain is directly derived from the parent Bitcoin blockchain; using a technique known as “two-way-pegging”.

Today, most people familiar with Bitcoin are also familiar with the concept of “altcoins.” Since Bitcoin is just software, anyone can make a copy and launch their own competing token. Of course, this new token will have no real value and will not have any of the security built into the original. Today there are hundreds of altcoins that operate on independent networks and have their own value relative to other altcoins.

The difference between a sidechain and a competing coin is that the value of its token is directly derived from the value of its parent chain. It also uses a technique called "merged mining" to obtain its security, making full use of the security of its existing parent chain network.

In this way, the “sidechain” is like another layer on top of Bitcoin. The value of the tokens exchanged on the sidechain is tied to the value of Bitcoin; therefore, users can trade these tokens just like Bitcoin because they are valid Bitcoins.

So, the next question is, how many sidechains are appropriate? The answer is, as many as we need. We can create only the right number of sidechains according to our needs.

Now, for the final piece of the puzzle, if we want to offload all low value payment transactions to the Lightning Network, there are a few important things to note.

The Lightning Network uses a series of interconnected bidirectional payment channels to facilitate the flow of funds, which are based on smart protocols that use hashed time locks. Here's the surprising thing. The Lightning Network is completely agnostic about which blockchain it is connected to! It works not only with the Bitcoin network, but with any cryptocurrency network as long as they provide the necessary smart protocol functions. This means that the Lightning Network can be implemented not only for the Bitcoin network, but also for any sidechain.

And, here’s the final piece of the puzzle, because the Lightning Network directly facilitates updates of signatures between smart contracts, it can also freely interoperate across multiple sidechains simultaneously!

So the solution to the scaling problem is similar to the solution we've taken to solve other network systems. Instead of trying to make the base layer bigger and bigger and bigger, instead, in response to the increasing number of users, we just add more sidechains in the background and move all the small low-value transactions to the fully interoperable Lightning Network.

Does this sound complicated? Well, it is. However, when this or a similar system is fully implemented, it will be completely invisible to the end user. Just as today, the average person can browse websites despite having absolutely no knowledge of the underlying network, similarly, the average person can be active on the Bitcoin network without knowing any of the underlying technical details or understanding any of its operations. Whether they simply open their Bitcoin wallet or use the Lightning Network through some sidechain, it will be completely invisible to them.

The purpose of this discussion is simply to suggest ways that we can solve the Bitcoin global scaling problem, and perhaps we should do so, rather than trying to make it too large by adding to it, losing its most important properties and putting the core Bitcoin network at risk. Instead, we scale to grow the Bitcoin ecosystem by adding additional layers on top of it. This is how most things in computer networks are being re-defined today. You don’t solve a problem by building bigger and bigger computers, you throw more and more computers at the problem. Once you can create one sidechain, you can create dozens or hundreds. Once you have a lightning network that works for one blockchain, it can easily work for hundreds. The solution to the problem can, will, and should be accomplished through the interoperation of multiple network layers, rather than trying to grow a single layer network to do something it was not designed to do, or the risks encountered in operation may destroy its key value in the process.

Revisiting my review of the Lightning Network

Finally, I want to reiterate my assessment of the Lightning Network from a “half full glass” (looking at it from the positive side) perspective. To be frank, my assessment mainly comes down to two points:

(1) The Lightning Network does not really exist yet, and it is likely that it will not be able to handle a significant proportion of Bitcoin transactions for a long time;

(2) The Lightning Network does not have the ability to offload almost all Bitcoin transactions and there are risks in transactions with larger amounts.

While both of these points are still valid, we should be concerned about what it can do once it is ready.

I have pointed out many times in previous posts and on the LTB podcast that the Lightning Network does an excellent job of offloading low-value transactions from the Bitcoin network. This raises the question of how many low-value transactions actually take place every day? I found some statistics from the blockchain and here are the results of these data.

This chart shows the percentage distribution of transactions on the Bitcoin network from 2014 to 2015 by value.

What you should be able to see is that about 30% of all transactions on the Bitcoin network are less than 0.01 BTC; these transactions are worth less than $5. About 60% of all Bitcoin transactions are less than 0.1 BTC (worth about $40), and 70% of transactions are worth less than 0.25 BTC; or less than $100.

While I still believe that the Lightning Network is prone to issues when offloading high value transactions, I think it will work well when transactions of around $100 or more occur. This means that once there is a fully functional Lightning Network, it might be able to offload around 70% of all payments; freeing up space for more users to store value, make high value payments, or open and close payment channels.

There is no doubt that this is obviously beneficial to the goal of promoting Bitcoin.

So, what will this accomplish?

•It would allow the existing Bitcoin network to support potentially 4 times the number of users it has today.

•This will provide instant confirmations in the form of Lightning Network for all low value payments.

• This will enable all sorts of new payment methods (truly microtransactions) that are not currently possible.

Once SegWit rolls out and wallets are upgraded to support it, we will achieve a 1.7MB effective block size limit, which in turn will support more users. If a 2MB hard fork is implemented later in the development process, it will support even more users.

This is a clear path to massively scale Bitcoin (10x more users) in the coming years without invoking any sidechains.

That said, even if we don't point it out, it could grow to the point where it supports 100x, or even 1,000x more people. To do that, we're going to need additional layers for those to enter the ecosystem. My idea is to have additional sidechains for people to hold value, using the Lightning Network as an intermediary to provide a bridge for them. Whether my conception or other ideas for sidechains come to fruition remains to be seen. The point is that if we give engineers enough time to work out these issues, there will be no limit to how much Bitcoin can scale, without drastically increasing the core block size limit to extreme and some say dangerous levels.

So, I suggest that the Bitcoin community should show some patience. We should not do anything too risky or dangerous that threatens the goose that lays the golden eggs. There are technical solutions to help achieve the common goals we all share, although it is undeniable that these technical solutions will take time and patience to build.

Finally, let me add some additional comments to questions I raised in a previous post about the Lightning Network.

•The Lightning Network doesn’t exist yet. This is still true, and still something to watch. The reality is that the Lightning Network won’t be able to offload a large number of Bitcoin transactions for quite some time. This is why the community is trying to increase the block size cap today, first with SegWit and then with 2MB HF, just to give us some breathing room until the core network can provide a real scaling effect and offload micropayment transactions.

• The Lightning Network scales transactions, not users: This is not entirely accurate. Since the Lightning Network requires on-chain transactions to operate, the number of users that can open payment channels is still determined by the core Bitcoin block size. However, if you move 70% of the small transactions in the Bitcoin network off-chain, this does allow for more users before we hit the cap than we project today. More importantly, using sidechains to anchor value, and Lightning Network interoperating between sidechains, are examples of how we can add more users to the Bitcoin network once the cap is reached. The reality is that we would love to have more users on the Bitcoin network. This will naturally lead to an increase in price and overall utility. However, these are "good problems to have". If we have so many people coming in, it will have to be a good state to grow the Bitcoin ecosystem. I recommend using sidechains or other layers that we safely insert into the network stack, because I believe software engineers can solve this problem. Especially now that I know that the Lightning Network can freely interoperate between multiple blockchains simultaneously.

• If Lightning existed, people would not immediately trust it. This statement is still true. However, I only proposed using Lightning to facilitate small transactions under $100. I think most Bitcoin users are willing to put up a small amount of Bitcoin to test an early Lightning beta release, maybe just $5, but over time, as people see the system function well, I believe they will then have the confidence to open a payment channel with a larger value of, say, $100 over a longer period of time.

• If Lightning Network exists, there will be a period of time when no wallet or payment provider will be willing to support it. This statement is also true. This is why even if some version of Lightning Network is launched for 6 months, it will still take a long time for it to be fully integrated into the ecosystem. Although it will take a while to complete this integration process, considering the promise of the technology, I think we should give it a try.

• The Lightning Network also has problems with large transactions. I still think this is true, but I don’t think it matters. In my opinion, the goal of the Lightning Network is to move small transactions off-chain while large transactions still happen on-chain.

• Lightning payment channels not only fail to promote, but also lead to a certain degree of centralization. I still believe this is true for large transaction use cases, but it is not a problem for small transactions. Since I started writing about the Lightning Network, I learned that the Lightning Network engineers are trying to encourage a mesh network model in which each user maintains not just a single payment channel, but four or more. The more connections maintained between users, the more likely the Lightning Network can remain decentralized and truly peer-to-peer. As long as these channels only lock up relatively small amounts of value, there will be no centralization risks I discussed earlier.

• Imbalanced payment channels and locking up a large number of Bitcoin transactions make the Lightning Network economically challenging. Again, this is only a problem if your goal is to use the Lightning Network to transfer all payment transactions, including large transactions. On the other hand, if your goal is to facilitate small value transfers, and each participant maintains multiple payment channels, this should not be a significant issue to worry about.

• Locking your funds in a payment channel means you are subject to market fluctuations. As before, this is of course a problem if you are opening a large payment channel, but for a small amount like $100, most people are more likely to tolerate a certain amount of volatility for a period of time.

• Users of the Lightning Network effectively have “hot wallets”. As before, this is a legitimate concern if you have all your money locked up in Lightning Network payment channels. However, for small amounts of funds, most people view this as an acceptable risk, similar to how we store small amounts of funds in mobile phone hot wallets today for ready access.

I mentioned in the article that the objections were all directed at those who wanted to move all payment transactions from the Bitcoin network to the Lightning Network, which was impractical or too risky. I still think so today, but for small transactions, there is no problem, as shown in the above figure, small transactions account for nearly 70% of transactions on the Bitcoin network.

When we find that our Bitcoin network is completely filled up with high-value transactions or more users, even after SegWit and 2MB HF are implemented, then we can safely add additional layers to the Bitcoin ecosystem to accommodate the needs of these new users.

Original article: http://codesuppository.blogspot.jp/2016/03/the-lightning-network-glass-is-half.html
By John Ratcliff
Translated by: Kyle & Peterhon & Printemps
Editor: printemps
Source (translation): Babbitt Information (http://www.8btc.com/ln-network-glass-is-half)