During the holiday season of 2013, the financial network of Visa was processing up to 47,000 transactions per second. Currently, Visa processes hundreds of millions of transactions every day. If Bitcoin were to reach the size of Visa, which is currently not possible because of its block size and the way the Bitcoin network works, its blockchain would be adding over 400 terabytes of data every year. Requirements for nodes to store large volumes of data would inevitably lead to the centralization of the network and defeat one of the main reasons why the Bitcoin currency exists today.
The issue of the block size on the Bitcoin blockchain
The reason why the Bitcoin network can only process between three and seven transactions per second is that Satoshi Nakamoto designed it to create new blocks every ten minutes and a block is 1 megabyte is size, which means that it can only include so many transactions. Some people believe that increasing the size of the block is the answer to the problem. Bitcoin Cash, which split from the main Bitcoin network on August 1, 2017, has increased the size of the block to megabytes, yet it quickly discovered that even with this size the network could get congested very easily. SatoshiDice, a block-chain based gaming platform, as of the writing of this article, accounts for about 6% of all transactions on the Bitcoin Cash network. This means that if the network were to add just twenty more gaming platforms, it would get congested again.
An increase in block size also means that validators on the network need to have more computing power, which, just like the size of the blockchain, could lead to the centralization of the network.
Micropayments on the Lightning Network
The goal of the Lightning Network is to preserve Bitcoin as a decentralized currency, yet make it available to more people. Because of this, the creators of the Lightning Network introduced the idea of micropayments. On the Lightning Network, a micropayment is a payment of any size between two parties that happens off the main Bitcoin blockchain. The developers of the Lightning Network argue that if Bitcoin were to get close to the processing power of Visa, which means going from 3 to 7 transactions per second to over 40,000 transactions per second, it would need to have transactions happening off the main blockchain, which is exactly what micropayments on the Lighting Network are. They also believe that if two parties that trust each other have a recurring transaction or a set of transactions of different sizes between them, there is no need for the entire network to know about what is happening between these two parties. Instead, the network would benefit if it were to contain as little information about these transactions as possible. This would increase the speed of the network and leave capacity for other transactions and data.
Most people today conduct transactions with each other by using paper or electronic fiat money. This means that they trust a third party with their funds, which creates risks and involves transaction fees for the parties. Many people do not realize that when they buy something with a debit or a credit card, the merchant doesn’t get the full amount because it has to pay a third-party to process the transaction.
The Lightning network could become a worldwide network for micropayments and allow Bitcoin users transact in the cryptocurrency using the computational power of consumer electronic devices.
On the Lightning Network, parties can keep a payment channel open indefinitely. There are no fees associated with an open channel. This allows the parties to defer informing the blockchain about their transactions without introducing counterparty risks.