Over the past two years, the majority of bitcoin developers in both the open-source development community and private sector have advocated for the integration of second-layer payment channels like Lightning, to enable micropayments or small transactions with lower fees.
Given the 1 MB block size limit of the bitcoin blockchain, it is not currently possible to settle small transactions with low fees. With the size of the bitcoin mempool often in the range of 50 million to 100 million bytes, it is virtually impossible to settle a small transaction such as a $1 payment on the main bitcoin blockchain.
But, second-layer solutions like Lightning create payment channels launched on top of the main bitcoin blockchain and allow users to send and receive batches of small transactions. The mechanics of Lightning and second-layer solutions for bitcoin are similar to a tab in a bar or a restaurant. Many transactions add up and eventually, the payment is processed as one single bill. In bitcoin, hundreds of transactions can be combined into one single transaction and broadcasted to the bitcoin network.
In spite of the hype and excitement around Lightning and other second-layer payment channels, the vast majority of bitcoin wallet platforms and exchanges have still not implemented any of the available second-layer solutions.
Recently, Blockstream developers Conrad Burchert, Christian Decker, and Roger Wattenhofer introduced a working paper which addressed the underlying issue in second-layer channels and provided a solution that could lead to the implementation and commercialization of instantaneous transaction-enabling channels deployed on top of the bitcoin protocol.
One of the major underlying issues of second-layer payment channels is locked-in funds. In order for a payment channel to work, multiple parties must allocate funds to a shared account. However, if the number of channels and parties or users increase, the size of the transaction that is ultimately broadcasted to the bitcoin blockchain (on-chain) rises.
“Micropayment channel networks create new problems, which have not been solved in the original papers. We identify two main challenges – the blockchain capacity and locked-in funds. Even with increases in block size it was estimated that the blockchain capacity could only support about 800 million users with micropayment channels due to the number of on-chain transactions required to open and close channels,” the paper read.
The paper emphasized that by confining channels from the original bitcoin blockchain and limiting the number of channels that are broadcasted on-chain, up to 96 percent of the blockchain space can be saved.
“By hiding the channels from the blockchain, a reduction in blockchain space usage and thus the cost of channels is achieved. For a group of 20 nodes with 100 channels in between them, this can save up to 96% of the blockchain space,” stated the Blockstream developers.
As such, the efficiency, practicality, and most importantly, the applicability of second-layer payment channels for increased transaction capacity can be implemented onto existing platforms.
In the long-term, depending on the adoption rate of SegWit, a large portion of businesses in the bitcoin industry will likely start considering the integration of payment channels, to provide lower fees and faster transaction processing to their users.