SegWit activation and availability of Lighting Network. Experts opinion

Today bitcoin is in a state of crisis… a few scenarios to reform bitcoin are offered… The result was a partially undefined compromise…

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SegWit activation and availability of Lighting Network. Experts opinion


Why is bitcoin network passthrough capacity now insufficient, hindering bitcoin exchange for services, goods and altcoins?

The most famous cryptocurrency among all, today Bitcoin is in a difficult state. Problem is, the existing size restrictions of 1MB today does not allow all volunteers to place their transactions into a new block due to the growth of bitcoin audience. Even the part of users willing to pay hefty commissions to miners is facing a fierce competition. To sell bitcoin is now a purely technical problem. Senders of small transaction end up even worse. Many altcoins have grown as a result of this bitcoin crisis.

How do they propose to reform bitcoin?

In order to solve the problem of the network’s insufficient passthrough capacity, bitcoin community has offered various scenarios for protocol update.

Ever since December 2015 Bitcoin core team members are working on soft update for Segregated Witness (SegWit or SW). Instead of increasing the size of bitcoin block they offer to resolve the issue by using the internal block space more efficiently. The block size will remain the same but inessential information will be recorded outside of the block, and so it will hold twice as much core information. Most of the SegWitsupporters also vouch to add superstructure for offchain payments called Lightning Network (LN).

The most notable among other suggestions is the idea of “hard” update called Bitcoin Unlimited (BU). BU authors advocate a number of considerable changes within the code, starting from increasing the block to at least 8MB and even more size later down the line. Unlike SegWit this idea is called hardfork – after the possible activation of BU, every miner will have to either agree to the changes or leave the network of BU supporters and join the opposing network, denying to accept the changes; in other words the network will split and this will weaken the Bitcoin. BU has a number of other risky aspects. The trust towards BU is further undermined by the fact that developers have made a few noticeable technical errors in course of its development.

A few other options have been put forth to resolve the scaling issue, and a portion of the community insists that the problem should be left without solution. They think that it is okay for bitcoin to be used only for huge transactions.

Followers of different solutions heavily criticize their opponents, sometimes unobjectively and biased but often fully grounded. Wrapping things up, none of the options for protocol update is devoid of considerable minuses. The only question is what can be considered a “lesser evil”.

Solutions established at Consensus 2017

Most part of the community has agreed that, “the lesser evil” would be SegWit, although those who insisted on BU had great influence. In the end a partly disputed compromise has been reached: On May 23rd at Consensus 2017 blockchain conference, the representatives of 56 major cryptoindustry companies (including cryptocurrency exchanges) have decided to implement a hybrid variation of the update called SegWit2MB, on condition that this option will support no less than 80% of bitcoin network hashrate. By now, this condition is already met. The nature of SegWit2MB is that in the nearest months softfork SegWit will be implemented not in the original variant but with following hardfork that will increase the block size to 2MB.

It’s important to understand that even though the decision to implement SegWit2MB is supported by the relative majority of the leading community members (including many BU supported), the majority itself is not overwhelming. Part of the community is still passionately opposing hardfork. Many also refuse to believe that SegWit2MB can realistically be implemented in a competent manner by its current supporters. Among the latter are many developers of Bitcoin Core who had previously vouched against combining SegWit and hardfork but later offered to independently lead the development of another scaling option that is highly similar to SegWit2MB. If SegWit2MB activation happens in its current scenario, the network passthrough capacity will increase which should fortify bitcoin rates and positions. No wonder that this consensus in and of itself had increased the number of users deciding to buy bitcoin for fiat currencies and reduced the number of those aiming to exchange bitcoin for altcoins for a certain period, causing a sudden spike in bitcoin price.

On the other hand, passionate hardfork opponents, who include a large portion of miners, may refuse the changes and continue to support the classic Bitcoin or one of the “original” SegWit modifications, which will lead to division in the network.

What is Lightning Network?

If SegWit takes action, the creation of the offchain Lightning Network (LN) superstructure will become possible. This “superstructure” will be based on a stand-alone node network of the upper level and usage of sidechains (“side blockchains”) to process transactions outside of the main blockchain. Sidechains can do an almost unlimited amount of transactions with minimum commission, using the main blockchain only to set up huge entries and exits. In other words, Lightning Network will only occasionally synchronize the results of transactions made in LN with the main blockchain.

For an average user Lightning Network will mean the possibility of very cheap transactions in an environment with a much bigger passthrough capacity. However, this network will be far more centralized as it is under a considerable control of the Lightning Network’s creators. For the most users and minor transactions this is quite acceptable, plus the main blockchain is always available for those dissatisfied with this opportunity.

More details on how bitcoin transfer works can be found here. You may also read this piece on how the bitcoin price is affected by the scaling problem.

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