Despite the amazing innovations Bitcoin has brought and its unbelievable growth, there are still some significant hurdles it needs to overcome in order to achieve widespread adoption, and that hurdle is scalability.
With Bitcoin, transactions needs to be entered into a block in order to be considered confirmed, and only so many transactions can fit into one so during times of high volume, fees can start to skyrocket because users try to outbid each other in order to get their transactions confirmed first since miners prioritize their transactions with the highest fees.
When it comes to transferring large amounts of money across borders, Bitcoin is a much better solution than the traditional financial system because the money can be transferred in a matter of minutes without any intermediaries. But for everyday purchases like buying a cup of coffee and bread, Bitcoin is probably quite impractical because no one wants to wait in a coffee shop while their transactions get confirmed or pay fees that cost more than the coffee itself plus by the time the transaction is confirmed, your coffee is probably already cold.
The solution to Bitcoin Scaling problem
The Lightning Network
A layer 2 network that actually runs on top of Bitcoin and was first proposed back in 2015. A layer 2 network is a separate network of transactions but one that still relies on the original blockchain for security and for the final settlement of payments.
The idea is somewhat similar to how credit cards work where at the time of payment there is a quick check for balance but the actual settlement comes days or weeks later.
How does Lightning Network works?
Let's make a scenario;
Two users open up a channel between them by each depositing an amount in a wallet. That opening a transaction is broadcasted on the blockchain as usual and the total balance of the wallet is recorded. From that moment forward, the users can send and receive funds between them up to the total amount in the wallet and these transactions are recorded only on the running tab that they have between them on the Lightning Network. And because none of the transactions are broadcasted onto the blockchain, they are practically instant and feeless. When one of the parties decides that they want check out, the channel is closed and their final balance is recorded onto the blockchain.
What's even better is you don't need to have a separate channel for every person you want to send Bitcoin to. With a big enough network you can just have one channel open and still be able to send payments to anyone in the world. This is pretty similar to how you connect your internet provider, and through them you can access the whole internet.
At that scale, the Bitcoin Lightning Network is expected to be able to handle millions of transactions per second - this is an unprecedented number that dwarfs Visa's 64,000 transactions per second and with fess that are practically non-existent it enables micro-payments too.
Cross-chain Swapping
The Lightning Network can also facilitate cross-chain atomic swap. So this means that two users could instantly exchange Bitcoin and Litecoin without the need of any intermediary exchange. All that is needed is for both chains to use the same cryptographic hash function and of course both support the Lightning Network.
Currently, Lightning Network is live and operational but to put it bluntly, it still hasn't achieved the user friendliness needed for wider adoption and the atomic swap functionality is still in its testing phase but progress is being made and if the price of Bitcoin is any indicator, the community is okay with waiting.
In 2021, the Lightning Network can potentially achieved its wider usage and seen to save time for people making transactions.