Blockchain, the underlying technology that powers cryptocurrencies like bitcoin, has enormous potential for the financial industry. The most immediate challenge is scaling the technology so it can handle increased transaction traffic and global adoption in the years to come.
Blockchains are the databases on which cryptocurrencies are created and stored electronically. They are essentially “distributed ledgers” that show all the members of a particular network every transaction that was verified on the network, from its beginning to the current time. The transactions are collected in blocks, which are secured approximately every ten minutes in a mathematical process called “mining,” and must be verified by other members in the network before they are confirmed. This full transparency means blockchain has the potential to solve the myriad regulatory and fraud issues that afflict the financial industry, as well as make many operations more efficient, but the overriding question is whether the technology can handle the kind of volumes that would be necessary for blockchain to be used more widely for payments of all types.
According to the industry, the Visa payment network is believed to complete 45,000 transactions per second during a holiday period, which increases to hundreds of millions on an average business day. But the Bitcoin Blockchain currently supports approximately seven transactions per second, and is limited to one megabyte of block space.
So how to achieve more than 45,000 transactions per second, while at the same time allowing micropayments (ie. payments less than a few cents) that the current system is unable to facilitate?
The Lightning Network, first proposed by Joseph Poon and Thaddeus Dryja in 2015, is essentially a low-cost and instantaneous micropayments network that operates two-way payment channels that would allow for increased number of transactions per second. This “overlay” network on top of the Bitcoin Blockchain promises to support a virtually unlimited number of off-chain transactions among users, at nearly no cost, while leveraging the security offered by Bitcoin.
In July, The Bitfury Group, the world’s leading full service blockchain technology company, in collaboration with the open-source Lightning Network community, released a white paper that offered a solution to a major piece of implementing the Lightning Network – payment routing. The paper introduced a payment routing algorithm, called Flare, which would allow for Lightning Network users to be able to successfully send payments to each other via connected nodes.
The Flare algorithm improves upon the original Lightning Network proposal, moving away from the original hub-and-spoke routing models originally proposed, to a model where there could be millions of nodes connected with each other allowing payment channels between users.
“The Lightning Network, an overlay solution to the Bitcoin Blockchain, will provide the ability to route payments between network users without the need to trust one or more intermediaries. The network is also designed to be decentralized, eliminating the need for custodial trust,” says Valery Vavilov, CEO of Bitfury. “These payments would happen off-blockchain, be secured by blockchain smart-contracts, and would allow for many more transactions per second.”
Bitfury and the Lightning Network estimate that the algorithm could scale up to accommodate “at least millions of network users.” “Simulations show it is enough to store paths to about the square root of the number of nodes in the network (provided nodes are reasonably well connected). For a network with 100,000 nodes, it is enough to store paths to just 600 nodes,” the authors write.
In the white paper, the authors consider a Lightning Network built on top of the Bitcoin Blockchain, but they stress that most of the results could apply to other blockchain systems with little effort, opening up commercial opportunities for Bitfury, which says it has already made considerable investments into this area.
“We consider the Lightning Network one of our major focuses in 2017 and beyond,” says Vavilov. “The Lightning Network will bring the Bitcoin Blockchain into a new era of commerce, digital asset transfer, and more. We are continuing our work on the Flare algorithm, as well as partnering with other companies to make the Lightning Network fully functional.”
That said, the authors of the report stress that the algorithm is still in the simulation stage, and more work needs to be done to validate the technology. In this regard, good news came in September, when the French bitcoin technology company ACINQ announced that it had successfully tested and implemented Bitfury’s algorithm for instant payments routing on the Lightning Network.
“This is a big step in the full creation of a working Lightning Network. This success exemplifies why The Bitfury Group is committed to research and to supporting the implementation of Lightning Network. Our dedicated engineers as well as our fellow Blockchain companies are committed to the success of Lightning,” says Vavilov.
“This test of Flare, with small modifications made by the ACINQ team, shows that our solution is not only theoretically feasible, but successful. We are now one step closer to bringing the Lighting Network into reality and solving the scalability issue of the Bitcoin Blockchain,” Vavilov adds.