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
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
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