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Bitcoin - Transaction Settlement on the World’s Blockchain
The digitization of our world is astounding. Over the past thirty years, communication, finance, education, governance, and more have increasingly shifted from physical to digital spaces. The internet has exploded as a result and the companies at the forefront of advancing humanity towards its digital future have been rewarded handsomely. Microsoft, Google, Apple, Amazon, and Facebook alone command nearly $10 trillion dollars’ worth of value and together capture the bulk of human interactions happening online.
Digital living has necessitated an ever-increasing number of online payments, and the online payments space is similarly dominated by a group of mammoth payment processors. Companies like Visa, PayPal, and Mastercard, while not exclusively tied to the digital world, nonetheless process the majority of payments on the internet, numbering in the hundreds of millions per day.
A digitally native world though calls for a digitally native payment method and cryptocurrencies have stepped in to fill the void, with Bitcoin chief among them. The Bitcoin blockchain, like the internet itself, runs on a decentralized worldwide network of computers. Its digital first nature makes it the perfect payments companion for the digital world that lives on the internet.
That said, a large number of critics, both from within and outside the crypto space, attack Bitcoin for its perceived scalability shortcomings. After all, the Bitcoin blockchain is currently capable of performing only a few hundred thousand transactions daily on its base layer, far short of the hundreds of millions of transactions taking place globally on a daily basis.
Missing The Forest For The Trees
Many of these critics think themselves well-intentioned and have tried to create alternative cryptocurrencies, or altcoins, that offer much higher base-layer transaction capacity. However, their blind criticisms put them in the position of misunderstanding and missing out on Bitcoin’s true value proposition as a global settlement network.
Bitcoin is the most secure computer network in the world and is growing stronger every day. It has never succumbed to a successful protocol-level attack and developers and miners work day after day to improve the network and make it even more resistant to any type of failure. On top of that, Bitcoin is not reliant on any entity for its functionality. No government or corporation needs to be consulted in order for Bitcoin to run its course, nor could they hinder the continual advancement of transactions on the Bitcoin blockchain even if they tried. Lastly, Bitcoin transactions settle after about ten minutes, which is exponentially faster than the days or weeks typically required in the traditional financial system, and anyone can participate in a transaction as long as they have access to their private keys and internet access.
These qualities do allow Bitcoin to function just fine as a payment processor for everyday transactions, but its strength lends itself to the settlement of much larger amounts of money and it is accomplishing that purpose quite well already:
The traditional financial system, with its armies of regulators, intermediaries, physical manifestations, and the like, simply can’t compete with Bitcoin’s blockchain on a value per fee basis. Similarly, blockchains tied to cryptocurrencies large and small are unable to offer the sheer amount of security and finality offered by the Bitcoin blockchain. Their computer networks are smaller, their consensus mechanisms are less robust, and the sizes of their network effects lend themselves less readily to assuring participants of each blockchain’s respective longevity.
So How Do We Scale Bitcoin?
The number of humanity’s daily transactions will continue to grow well into the future. While Bitcoin does represent the strongest monetary settlement network in history, scaling solutions will be necessary in order to ensure that the world’s transactions can live on top of the world’s blockchain. Thankfully, those scaling solutions are already in the early stages of development and implementation:
The Lightning Network
The Lightning Network is a layer-2 protocol that allows for near-instantaneous settlement and has no theoretical limit to the number of simultaneous transactions that can occur. Transaction fees on the Lightning Network are also dirt cheap, amounting to mere fractions of a penny, which has led to an increase in its use on crypto services, like those from Strike and Kraken, as well as in a host of business-to-consumer transactions.
The Lightning Network allows participants to establish “bidirectional payment channels” on the Bitcoin blockchain by sending initial amounts of Bitcoin into a multi-sig transaction, which can then be exchanged back and forth between the participants any number of times before the channel is closed and the final Bitcoin balances are broadcasted to the Bitcoin network. Additionally, participants who haven’t established a direct payment channel with one another are still able to transact if they have sufficient peers in common to find a path for the payment.
Given the immense strengths of the Lightning Network, tens of thousands of transactions are already being processed daily on the protocol and it is experiencing significant growth at a rapid pace.
Cryptocurrency Exchanges and Crypto Banks
In the traditional financial system, transferring money from one bank to another takes several days and a lot of leg work behind the closed doors of the banks. In a nutshell, banks work to reconcile whether the sender has sufficient money to settle the transfer. If yes, the money will eventually show up in the recipient’s bank account.
Bitcoin’s blockchain, on the other hand, is public by nature, meaning any entity is able to verify Bitcoin balances (or UTXOs, for the more technically inclined). And since transactions settle with finality every ten minutes, Bitcoin transactions, whether between large corporate entities or individual users, can be settled much more quickly than with traditional banks.
We are moving towards a world where a large number of Bitcoin transactions will happen in one of the following ways:
Between user accounts held at the same crypto institution, in which transactions essentially equate to balancing the institution’s ledgers instantaneously and with minimal cost.
Between user accounts held at different crypto institutions, in which user balances can be verified on the public blockchain and actual customer transfers can be settled in bulk by the institutions themselves on the base Bitcoin blockchain.
Both scenarios enable nearly limitless scalability of Bitcoin transactions, while taking full advantage of Bitcoin’s strengths as a global settlement network. In a nutshell, Bitcoin promises to be the most secure, scalable, decentralized network the world has ever seen.
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Crypto Company: The company formerly known as Facebook has indicated that it is opening up its advertisement platform more fully to crypto and blockchain companies. Read more
Bitcoin ETFs: Investing powerhouse Fidelity is about to launch a Bitcoin spot ETF in Canada, a move that some analysts believe casts further doubt on the SEC’s current position against spot ETFs in the U.S. Read more
Bitcoin Nation: The country of Chile is contemplating passage of a law that would recognize Bitcoin as a legal means of payment in the country and could pave the way to goods and services being priced in Bitcoin. Read more
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