DeutschWhen the concept for Bitcoin was developed in 2008, it was not yet foreseeable what course cryptocurrencies would take in the following years. But at the latest in 2013, when the value of a Bitcoin exceeded the 1,000 USD mark for the first time, it became clear that the blockchain technology underlying Bitcoin would not be able to withstand the growth in the long run.
Limit from past Times
Due to the defined block size of 1 megabyte, the number of transactions that are possible within a unit of time is limited. Originally, this artificial limit was intended to make attacks by large blocks impossible. Specifically, this means that only about 7 financial transactions per second can be processed worldwide – a vanishingly small capacity compared to credit card providers, who process tens of thousands of transactions per second.
In August 2017, Bitcoin Cash (BCH), a spin-off of Bitcoin, was developed. With BCH, the block size limit is 8 MB. Until the spin-off, BTC and BCH share their blockchain history, but since the mining of the first block with a size of more than one MB, the two chains are separate. In order for the original to have a future as a means of payment, the problem of scalability must be solved.
Intervention via SegWit
The soft fork Segregated Witness, or SegWit for short, is an extension of the Bitcoin protocol. SegWit offloads the transaction data (witness data). The existing protocol is not changed, but SegWit hides its block size of 1.8 MB and thus bypasses the limit of 1 MB. After the SegWit update, the Lightning Network was developed and implemented into the protocol. It enables countless transactions in real time using an off-chain solution.
So far, every transaction had to be placed on-chain, i.e. directly on the blockchain. Due to the boom of Bitcoin, the demand for this placement also increased and the fees that were charged for the rare space in the transaction blocks that had become too small increased immensely. They exceeded small Bitcoin balances, which thus lost their value.
What is the Lightning Network?
The Lightning Network is a second-layer scaling solution that can process small transactions without burdening the blockchain. This second-layer protocol is an abstraction layer that lies above the actual blockchain. Payment channels, also called hubs, are used. Only the opening of a hub takes place on-chain. After that, largely anonymous and cost-effective transactions can take place in real time via this payment channel (which works in both directions) off-chain. The participants only need a so-called multi-signature wallet for this. This makes even small balances worthwhile. When the transactions have been processed, the channel is closed on-chain. Overall, much less space is used on the blockchain per transaction than without the Lightning Network, which makes transactions cheaper and faster.
