Bitcoin faces major scalability tradeoffs to keep it’s main goal of decentralisation, limiting its ability to process transactions at the scale of traditional payment systems like VISA.
While VISA handles around 4,000 transactions per second (and can scale up to 65,000), Bitcoin’s main blockchain processes only about 7 transactions per second due to its 1MB block size limit.
This bottleneck challenges Bitcoin’s potential as a global financial system.
The Lightning Network is introduced as a novel off-chain solution to Bitcoin’s scalability problem. It allows everyday, small transactions to be conducted without recording each transaction on the main blockchain, thus overcoming the 7 transactions per second limit.
The Lightning Network operates by opening payment channels between two parties (e.g., Bob and a coffee shop). Both parties deposit Bitcoin into a multi-signature address, which functions like a jointly controlled safe.
A balance sheet tracks how funds are distributed. Transactions within this channel update the balance sheet but are not immediately broadcast to the blockchain, enabling hundreds of thousands of transactions off-chain with minimal fees.
These payment channels can be closed at any time by broadcasting the latest signed balance sheet to the Bitcoin blockchain (closing the channel). This results in only two on-chain transactions: one to open and one to close the channel.
The Bitcoin network validates the final distribution of funds, ensuring security and transparency.
Watch this video to understand what Lightning Network is and how it will allow Bitcoin to scale to levels that compete with current payment networks.
The Lightning Network Simply Explained
