$100 Million For 2 Pizzas?
When Laszlo Hanyecz made the pioneering first bitcoin purchase, his pizzas cost him about $40. Those 10,000 bitcoin are worth more than $100 million today - no, that’s not a typo - One Hundred Million Dollars for 2 pizzas!
Laszlo’s pizza purchase yesterday is more than symbolic for bitcoin because the lightning network has long been heralded as bitcoin’s second-layer savior, an off-chain solution to the crypto-juggernaut's perennial scaling woes.
The bitcoin blockchain is extremely robust and secure, but this level of security comes at a price. Bitcoin has a hard size limit of 1Mb blocks, it can only process 7 transactions per second (compare that to 60 for BCH, 200 for PayPal, and 24,000 for VISA), and with a 10 minute block time plus the requisite 6 confirmations, a full hour for a confirmed transaction is a best-case scenario.
During the pre-Christmas bitcoin mania, there were as many as 200,000 BTC transactions in the mempool (backlog), transaction fees rose as high as $40, and confirmations could take days. Clearly an untenable situation for buying a pizza.
The Promise of Lightning
The Lightning Network promises to change all that by taking micro-payments off the main chain and, with some clever legerdemain combining smart contracts with multi-signature wallets, transact them on a separate layer of nodes that only occasionally needs to communicate with the main chain.
As Satoshi wrote in his original whitepaper, “A Bitcoin is defined as a chain of digital signatures”. To own a bitcoin (or a fraction of one) is to own the only private key with the cryptographic combo that opens the public address which is the terminus of a transaction chain.
A bottleneck arises because of the “weight" of transactions - no matter how small, every transaction contains accounts (sender & receiver), amounts (in the form of inputs and outputs) and digital signatures (a unique message-dependent digital signature is created for each transaction). Even the tiniest of transactions must be broadcast to the entire network.
The result is an unwieldy blockchain with the bulk of its blockspace occupied by tiny transactions.
Balances Replace Transactions
The lightning solution is private-channel peer-to-peer unicasting instead of broadcasting, and a multi-signature wallet with a bitcoin balance for transactions. The savings in transaction weight is enormous because instead of a full "accounts-amounts-signatures" transaction for every micro-BTC that changes hands, there is simply an update to the balance sheet that each party digitally signs - like a single check with a changing amount.
In this way, balances replace transactions and micro-payments are removed from the main chain. Only when a channel is closed is the final balance sheet saved to the main chain.
Far From Perfect
Lightning is far from perfect and of course it has its detractors, who rightly point out that it is suboptimal for large payments and the reliance on private nodes is anathema to the decentralization ethos of bitcoin. There is also the issue of dispute resolution and how to deal with unresponsive peers.
Which Crypto Will It Be?
The Wall Street Journal, in an article entitled “Tech That Will Change Your Life In 2018”, predicted that this will be the year you will buy a pizza with cryptocurrency. Which crypto will it be? Will it be through the Lightning Network? That remains to be seen.
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