The need for various stakeholders to exchange value to realize a transaction and satisfy customer requests is one of the main drivers of this global complexity. Unfortunately, this same global complexity is being seen regarding bitcoin scalability. Trading crypto has never been this easy at Bitcoin needs to scale and meet the needs of all participants across the supply chain or risk stifling innovation and slowing down progress.

For bitcoin’s scalability issues to be resolved, we need solutions that enable chain-level and off-chain scaling solutions. The system also needs protocols that allow people worldwide to transact without bottlenecks or limitations imposed by their governments or local economies. Without a solution to scalability, the main issue facing bitcoin will be the lack of funds coming into the market and the inability of people to use bitcoin for its intended purposes. 

Bitcoin is used by millions of people all over the world, from as far South as Argentina to as far North as Norway. People transact with bitcoin for many uses, including buying and selling goods, purchasing real estate, or even paying for lunch.

All those transactions take place on-chain, and if those transactions start to slow down, the bitcoin price is likely to reflect that mainly because there isn’t much room left in the blocks for more transactions. As a result, innovation will slow down, and adoption will decrease. It might sound like a worst-case scenario, but this scenario is not out of the realm of possibility.

What does scalability mean on the bitcoin network?

If you have been in the bitcoin space for a while, you are likely well aware of the scalability problem bitcoin is facing. Bitcoin’s current primary chain size has almost reached the maximum 1MB block size limit. In addition, the number of transactions on-chain is growing daily, so there needs to be more space in the blocks for more transactions. If we want to resolve this issue and increase volume on the main chain, we need to either increase block size or find an alternative solution to scale bitcoin’s on-chain capacity.

Off-chain scaling solution is more efficient and effective.

When it comes to off-chain scaling solutions, they can be placed into two categories, centralized and decentralized solutions. Centralized solutions include payment channels and, in the context of this topic, Lightning Network. While both payment channels and Lighting are essentially off-chain solutions, some differences are significant to understand. 

Payment channels have a function similar to relay nodes in bitcoin’s network, which allows the sender of funds to send money back and forth on-chain without needing large amounts of data to be transmitted. The actual implementation is different from bitcoin’s network, but it serves the same purpose: to allow money to be transferred off-chain without increasing block size.

It is possible by having several state changes between two participants outside the central blocks on the chain. People can do these off-chain transactions so that the data sent is only necessary for the two participants to complete the state changes. It is similar to Bitcoin’s transaction relay function and can be considered a layer between bitcoin’s main chain and off-chain payment channels. It enables many transactions on-chain while maintaining the same block size limit.

On the other hand, a lightning network is a much different solution. Built on top of bitcoin’s main chain, it allows for state changes between two parties that do not require data to be sent on-chain. Because of how it is implemented, this allows for a much higher number of transactions on-chain simultaneously.

The purpose of both payment channels and Lightning networks is to allow off-chain payment settlement, meaning that there can be more transactions on-chain than currently available.

Scaling solutions must be compatible with bitcoin’s core protocol: 

Scalability solutions must be able to work with bitcoin’s core protocol but do not need to be a part of it. The scaling solutions can also operate independently from bitcoin’s primary protocol as long as they do not impact the safety and security of the network. Scalability solutions need to be customized to the needs of each participant in a supply chain.

The issue with bitcoin’s scalability is that as on-chain volume grows, there is a need for more capacity on the main chain. This additional capacity can come from either increasing block size or implementing off-chain scaling solutions. Suppose we are going to resolve the scalability issues. In that case, we need protocols that can handle thousands of transactions per second while still maintaining the same level of security that currently exists.

These two categories of off-chain scaling protocols not only increase the speed and efficiency of transactions but also solve issues with privacy and fungibility (transaction indistinguishability), which is an integral part of bitcoin’s privacy by design.

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