Welcome to Crypto Jargon, in this episode I’m breaking down the terms related to scaling and in particular the scaling issues of Bitcoin like Segwit and the Lightning Network So stay tuned, It’s quite a long video,
time to get started Now let’s first start with what is “scaling” It is increasing the capacity of a system, network or process, in order to handle a growing amount of work. I talked about blocks and the block size in another episode already, but if you missed it, let’s just explain this briefly Bitcoin transactions are recorded and stored on files that are called blocks which are linked to each other which is the basis of the blockchain Each of these files or blocks has a limited capacity and somewhere in 2010, Satoshi Nakamoto the creator of Bitcoin himself set a limit to the size of each block on the Bitcoin blockchain to be 1 megabyte The reasoning at the time was, that it’s safer for the network and that in the future – if necessary – it can be increased But in 2013 Satoshi disappeared and that limit was never increased Fast forward another few years and it’s 2016, Bitcoin is the hottest new asset gaining a lot of traction, and experiencing a large daily volume of transactions more than 200,000 on average and along with that some pretty inflated fees on its transactions You see Bitcoin’s transaction fees had been almost zero for quite a while in the early years And that was a very big part of its appeal to the early adopters cheap, fast and uncensored money transfers across borders, But in late 2016 and early 2017 the network was getting slow. The problem that Bitcoin was facing was that new blocks are generated every 10 minutes and are constrained to a maximum size of 1 megabyte so only a certain amount of transactions can be added to each block The weight of the transactions was causing delays in processing and in some cases it was taking hours or even days to validate a transaction the average transaction fee had risen from 3 cents to 30 cents to three dollars and even to a whopping thirty dollars during the high peaks in late 2016 and throughout 2017 even transaction fees of $100 had been recorded although these were rare cases. But still the near zero fee magic of Bitcoin hid evaporated long ago and now things were getting heated The community was getting divided into two Those in support of “On-chain scaling” through increasing the block size to whatever the network needs in order to keep the fees low and transactions fast and those in support of “Off-chain scaling” via external channels that could take off a lot of the transactional volume from the Mainnet and keep the network run smoothly without increasing the blocks The first group are also known as big blockers since they are in favor of a bigger block size They argue that Bitcoin was created to handle an increase on the blocks as the network grows And this is true Originally, there was no fixed limit The opposite camp: the Small-Blockers, argued that Satoshi himself put in place the block size limit and this was the safest way to avoid a network attack and miner centralization so it must be kept this way. Which is also true In addition to that, another solution was already proposed the previous year which suggested that the block capacity can be increased by separating the digital signatures from the transactional data What does that mean? Well, each transaction consists of inputs and outputs there could be one or multiple inputs and outputs involved in a single transaction A huge part of a transaction is the digital signature. It takes about 65% of the space and this proposal attempts to ignore the data attached to a signature by stripping-off that signature from within input and moving it. So a structure towards the end of a transaction. It doesn’t completely reject it, It doesn’t ignore it. This process is known as Segregated witness or SEGWIT for short This solution would more-than double the available space in each block So in a way, it is an increase of more than 2 MB per block and in addition to that Segwit also solves the problem where a receiver could intercept and modify the sender’s transaction ID in order to get more coins from the sender. Since the digital signature would be detached from the input there is no way of changing the transaction ID without also nullifying the digital signature so this is what Segwit does in simple terms, It creates more space within the block for more transactions, hence why it is referred to as an on-chain scaling solution Segwit was accepted by the majority of the Bitcoin community and it was activated in the summer of 2017 However, part of the mining community – the Big-blockers, opposed the Segwit solution and took another direction by creating a hard fork now known as Bitcoin cash that supports bigger block sizes like 8MB and even 32 MB. That coin forked again in 2018 and hasn’t had a very smooth ride since its creation, But that is a different topic altogether Back to Bitcoin scaling solutions and here is the next one in the form of “side chains” Which is where the Lightning Network kicks in. This is one example of an Off-chain scaling solution at the core of the Lightning Network proposal is the usage of site channels for micro payments in simple terms, users can open a channel for multiple payments and the transactions that are made through that channel do not get recorded on the main blockchain until the channel is closed. You can make hundreds of transactions
on that side channel and when you decide that your business is done you will close the channel and only transmit the end result to the main network as a single transaction instead of hundreds of transactions. which as you can imagine, will reduce the volume of pending transactions significantly For example, You are a business owner and you open a channel for your company’s payments and you transact 5 bitcoins-worth over a period of one day. there are transactions going in and out, many of them, most of which are micro-payments for small amounts, which would otherwise incur fees that may be too high for these payments to be considered reasonable and Inside your channel, you don’t charge the fees or you charge very little fees very small fees compared to those on the main blockchain. This way you provide affordable service, so it’s good for your business At the end of the day you close that channel, You have a starting balance and end balance and you transmit that to the main blockchain as a single transaction Instead of all of the transactions that occurred during that day Sounds less complicated, right? Well, this is as simple as I can explain it There are some opponents to the Lightning Network since it involves a third party which will be a central authority But the main blockchain is still there. Should you decide to transact directly there and you know that is still peer-to-peer, uncensored so I don’t really see much weight to the arguments against the Lightning Network However, the Lightning network is still in its infancy and only being used by tech-savvy programmers at this point But it is growing and hopefully soon it will become more widely used. In the future, there will be even more added layers and other Off-chain scaling solutions, so we will be seeing a lot more development in this space Enjoying this content? why not grab a copy of my book: Crypto Jargon A to Z the most thorough dictionary that exists to date with over 700 definitions of acronyms, trading slang and all the crypto terminology you need. Just go to ojjordan.com/cryptojargon and grab your digital copy today.