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Cryptocurrencies

The Lightning Network and Its Functions

Solving the Bitcoin scalability problem is no easy task. This problem has taken a long time of research and development, but the solution could already be among us. Its name is Lightning Network and could lead Bitcoin to the apex of scalability to deal with the massification of cryptocurrencies. The Lightning Network protocol is a […]

Solving the Bitcoin scalability problem is no easy task. This problem has taken a long time of research and development, but the solution could already be among us. Its name is Lightning Network and could lead Bitcoin to the apex of scalability to deal with the massification of cryptocurrencies. The Lightning Network protocol is a […]

Solving the Bitcoin scalability problem is no easy task. This problem has taken a long time of research and development, but the solution could already be among us. Its name is Lightning Network and could lead Bitcoin to the apex of scalability to deal with the massification of cryptocurrencies.

The Lightning Network protocol is a protocol designed to improve the scalability of Bitcoin. This is possible because Lightning Network works as a second layer on Bitcoin. One that allows this cryptocurrency to perform things that it normally could not and more specifically; instant transactions with very low commissions. The development and creation of this protocol began with the work of Joseph Poon and Thaddeus Dryja. But at present, it is companies such as Blockstream, Lightning Labs, and ACINQ that drive the development of it. The whitepaper of this development can be found at that link on their main website.

To understand a little of the potential of this technology, we need to keep two things in mind. The first is that Bitcoin was created as a digital money solution. Second, that goal is impossible to achieve in the current state of the Bitcoin network and software. The reason for this is very simple: Bitcoin has trouble scaling.

Currently, Bitcoin can only process 7 to 8 transactions per second. This is a very small capacity and it cannot cope with the massive use of cryptocurrency. As a result, the Bitcoin network becomes slow and very expensive when it comes to paying commissions. For this reason, a new way of performing transactions quickly was needed, which was simple to use and compatible with Bitcoin without making major modifications. The answer to these needs and more is Lightning Network, a protocol from which we will learn a little more below.

Why is needed to improve the scalability of Bitcoin?

Surely you are asking yourself this very question and it is your right. You will think that if Bitcoin has such a powerful and extensive network then why it should improve its scalability. The short answer is; because by improving scalability, transactions are done faster and less expensive.

To explain the answer at length let’s do this little exercise. Imagine you do a transaction in Bitcoin. At that time the Bitcoin network has very little use and the commission cost of each transaction is very small.

However, the cost of fees may increase as network usage increases. This is because a queue or excess of transactions is generated in the mempool. It is there that miners tend to prioritize transactions with higher commission payments for more profits. That way, if you want a transaction to be processed quickly, then you will have to pay more in commissions.

But the latter case also tells us that commission costs will increase to the point where we will not be able to make micro-payments. For example, sending 1 dollar may result in more than 1 dollar for the cost of the commission. This is a meaningless situation and one that scalability improvement can solve, hence the need to improve this feature.

How Lightning Network works

The operation of the Lightning Network depends on several technical factors and a process to make it safe to use. First, Lightning Network depends on the non-malleability of the cryptocurrency being secured. In this way, it would be impossible for a third party to change the information about the transactions or cryptocurrencies during the verification or generation process.

In Bitcoin and Litecoin the non-malleability property of the transactions was introduced thanks to the arrival of SegWit (Segregated Witness). With this soft fork, Bitcoin solved this problem and put the first building blocks for a new way to scale its capabilities.

That’s how the development of Lightning Network and its so-called pay channels began. These payment channels are the cornerstone of Lightning Network operation and the key to enabling unprecedented scalability in Bitcoin.

What are paid channels?

Payment channels are the basis of the Lightning Network. A payment channel is actually a multi-signature transaction in the blockchain with at least one of them sending funds. In this channel, each person has a private key and each future transaction can be made only if the keys of the two parties sign. This is a means of consensus that the compromise has been approved to be executed by both parties.

In addition, payment channels may be open for a certain period of time. Normally this is about 10 minutes or what it takes to mine the next block on the blockchain. But once the channel is opened, channel participants can instantly exchange assets between themselves using the funds stored in that channel. In a nutshell, this means that parties that are part of a Lightning Network payment channel can make payments to each other instantly.

Despite this behavior, the transactions made in said payment channel are completely valid in the blockchain. This is because once the channel is closed, the transactions made are transmitted to the network, verified, and included in a Bitcoin block.

Explaining how Lightning Network works

To understand how Lightning Network works, it’s best to break down your entire operating process step by step. For that reason, we will explain to you a simple exercise on how to perform this process along with other points of interest to clear all your doubts.

First, within Lightning, we will have two participants who will create an initial transaction in the $20 blockchain. Of that $20, $10 will be from Carmen and $10 from Aitor. This deal could be different and can vary within the channel we mentioned earlier, so Carmen could have $15 and Aitor $5 at the end of all exchanges.

What Lightning does is take the technology behind the paid channels and create a network that shapes them using smart contracts to make sure the network can run on a decentralized basis.

In this regard, we would have the following breakdown of the process:

  • Carmen opens a pay channel with Aitor that in turn has a channel with Laura, which in turn has an open channel with David.
  • Right now we have 4 parties participating in different payment channels or payment channels.
  • Carmen wants to exchange assets with David, so she can send funds through Aitor and Laura to ultimately reach David, the recipient.

Due to the nature of the Lightning Network, Carmen would not have to rely on Aitor and Laura within the process as cryptography is used to ensure that the funds David will receive will be exactly the same as Carmen has sent. Otherwise, they’ll be automatically returned to Carmen.

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Crypto Guides

Can ‘Discreet Log Contracts’ Potentially Gear Bitcoin for DeFi?

Introduction The term “DeFi” has gained significant popularity in the cryptocurrency space since the beginning of 2020. Over hundreds of projects have already been implemented on Ethereum based on the intersection of blockchain and decentralized financial systems. The appealing ones being collateralized stablecoins and derivatives products. Given that the ecosystem can be feasibly built on […]

Introduction The term “DeFi” has gained significant popularity in the cryptocurrency space since the beginning of 2020. Over hundreds of projects have already been implemented on Ethereum based on the intersection of blockchain and decentralized financial systems. The appealing ones being collateralized stablecoins and derivatives products. Given that the ecosystem can be feasibly built on […]

Introduction

The term “DeFi” has gained significant popularity in the cryptocurrency space since the beginning of 2020. Over hundreds of projects have already been implemented on Ethereum based on the intersection of blockchain and decentralized financial systems. The appealing ones being collateralized stablecoins and derivatives products.

Given that the ecosystem can be feasibly built on a smart contract using Ethereum, the concept of open finance cannot be excluded from Bitcoin. For instance, sidechains like RSK (rootstock) can upgrade their smart contract capabilities, enabling more advanced financial products to build on Bitcoin.

That said, there are some other enthralling ideas on extending the Bitcoin’s structure to more sophisticated financial applications. Out of which, one exciting proposal that is in the talks over a few years is the discreet log contracts.

Bitcoin for DeFi – A Sustainable Approach?

Developers are uncertain about bringing in DeFi applications on Bitcoin. People believe that the reason for its significant value to date is due to its simple, stripped-down reliable design.

Contrariwise, ideas such as the lightning network for Bitcoin has resulted in an entirely new design for it. With the feature of layered scaling, applications can be still be created without hindering the security model of bitcoin’s core protocol.

The success has hence opened doors for exploring applications that help leverage bitcoin without having to compromise on its existing design.

But limitations exist…

The most significant trade-off is the complexity of DeFi applications. RSK could no doubt prove to be a valuable sidechain for Bitcoin, but federated peg sidechain essentially requires trust in controlling the chain.

Additional improvements in the underlying technology can reduce trust even further. The compelling DeFi projects on the Ethereum protocol is not possible to incorporate on Bitcoin’s protocol without compromising trust.

Cutting through the interesting project ideas, let’s get our feet wet to understand and generalize the concept of Discreet Log Contracts.

What are Discreet Log Contracts?

Proposed by Thaddeus Dryja, discreet log contracts are an ecosystem for minimizing the trust in blockchain oracles – assimilating data from external sources to the blockchain. Discreet log contracts pivot using Schnorr signatures to disguise the agreed upon contract information from the oracles.

This creates a scenario where payouts on data (public) are possible between three parties. The advantages of it being better security and flexible contracts without having to compromise on the trust.

Useful Ecosystem?

When applied to DeFi, the two parties can maximize their discreet log contracts and unleash the potential of derivatives, futures, and several other financial instruments. More advanced financial products when knotted to bitcoin, institutional practices like hedging risk on assets can become viable through the Bitcoin’s network. With the reliance on oracle-sourced data for payouts, micro-insurance contracts are possible using the discreet log contracts.

Conclusion

The prevalence of DeFi systems built on the Ethereum is hindering the notion of open financial products for Bitcoin. But considering the robust security model and consensus rules, the Bitcoin network does put forth a captivating medium for decentralized finance. And discreet lot contracts are an appealing tool that can help developers develop a more advanced open finance ecosystem with Bitcoin.

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Crypto Daily Topic

Altcoins with Lightning Network Support

Satoshi Nakamoto’s vision was for Bitcoin to be a digital currency that could be transferred between users in a fast and secure manner. However, if he intended for the network to one day compete with established payment systems, then he probably did not take into account the scalability level that Bitcoin would need for that to be possible.

Lightning Crypto_Forex Academy

Satoshi Nakamoto’s vision was for Bitcoin to be a digital currency that could be transferred between users in a fast and secure manner. However, if he intended for the network to one day compete with established payment systems, then he probably did not take into account the scalability level that Bitcoin would need for that to be possible.

Satoshi Nakamoto’s vision was for Bitcoin to be a digital currency that could be transferred between users in a fast and secure manner. However, if he intended for the network to one day compete with established payment systems, then he probably did not take into account the scalability level that Bitcoin would need for that to be possible.

As it is now, Bitcoin can muster only seven transactions per second, which pales in comparison to, let’s say, Visa’s 1700. And as more users troop to the network, waiting times and transaction fees continue to increase.

If Bitcoin hopes to ever compete with existing payment models, some adjustments may need to be made to its fabric.

The Lightning Network

Lightning network_Forex Academy

Over the years, Bitcoin developers have come up with several solutions to this problem, from Plasma to Segregated Witness, to sharding, to the Lightning Network (LN).

Proposed by Thaddeus Dryja and Joseph Poon in 2015, LN is an extra layer for the Bitcoin blockchain that uses two-way payment channels to allow users to transact with each other with very nominal fees. Once the parties close the channel, only the initial and final transactions are recorded on the Bitcoin blockchain. Users in a payment channel conduct as many transactions as they want – which happens within seconds and with minuscule fees.

The idea is to reduce congestion in the Bitcoin blockchain and to achieve fast transactions since users do not have to wait for transactions to be processed. On LN, participants can engage in transactions without the need to know or trust each other.

LN is designed for Bitcoin’s scalability problem, but several other cryptocurrencies are looking to adopt the technology to enhance their scalability. Cryptocurrencies that use a different model from Bitcoin, and are hence incompatible with the technology, are working on a similar solution. This article is a look at various cryptocurrencies’ take on the Lightning Network.

Bitcoin and Lightning Network

Bitcoin Lightning_Forex Academy

Lightning Labs, a company dedicated to developing scalability solutions for Bitcoin, released a beta version of the technology for the blockchain in December of 2017. This year, the team announced that they had developed a v0.10 beta version, which is an upgraded version of the first release. This version comes with improvements such as bug fixes, architectural improvements, better security and privacy, and more.

Lightning Labs is not the only startup that’s working on an implementation of the Lightning Network. Other companies such as C-Lightning, Blockstream, and ACINQ are also working on their version of the tech.

Also, several developers have already worked on Lightning Network wallets. Some available options include:

  • Eclair – a mobile wallet for Android designed by ACINQ
  • Munn Wallet – A non-custodial wallet that enables you to make instant payments without configuration procedures
  • Zap – A free Lightning Network wallet that’s simple to use and user-experience-focused.
  • Nayuta Wallet – This a non-custodial wallet for Bitcoin and the Lightning Network
  • Phoenix – This is a non-custodial wallet Lightning Network wallet with a user-friendly and intuitive interface
  • SATs App – SATS App allows you to send Bitcoin like you would a text message, via the Lightning Network

Litecoin and Lightning Network 

Litecoin is modeled after Bitcoin, and is often referred to as ‘the silver to Bitcoin’s gold’. As such, you would expect that the two cryptocurrencies are in direct competition.

Indeed, Lightning Labs’ initial debut implementation of the technology went live on both Litecoin and Bitcoin’s blockchains. Also, the company’s cross-atomic swaps function (the direct swapping of tokens between respective blockchains- bypassing crypto exchanges) was first tested on both Bitcoin and Litecoin.

Though the technology is yet to be implemented on Litecoin, when it does, it will give the network a much-needed push towards wide adoption.

Ethereum and Raiden

The Ethereum network can process transactions two times faster than Bitcoin. Ethereum can currently process 15 transactions per second, while Bitcoin can process 7.

However, Ethereum’s blockchain has more users and is busier than Bitcoin’s since it also runs decentralized applications (DApps) and facilitates initial coin offerings (ICOs). This means the network handles a lot of traffic as it processes token sales and smart contracts. As such, Ethereum needs a different scaling solution, but one uniquely suited to its needs. Several proposals are in the works, but a notable one is Raiden.

Raiden’s concept is much like that of the Lightning Network: providing an extra layer aside from the main blockchain through which individuals can use two-way payment channels to conduct instant and secure transactions with very nominal fees. The difference lies in that Raiden is ERC20 compatible, meaning all tokens issued on Ethereum can use Raiden.

ZCash and BOLT 

The Lightning Network will make transactions on transparent blockchains like Bitcoin a bit more private since payments on the two-way channel will not be broadcasted on the main blockchain. However, the initial and final transactions will be added to the main chain.

ZCash is a privacy crypto network that seeks to provide users with enhanced privacy and anonymity. The Lightning Network’s incomplete privacy state will obviously not mesh well with ZCash – necessitating the need for its own scaling solution.

The network’s proposed solution for this end is called ‘BOLT’ (Blind Off-chain Lightweight Transactions). Created by Ian Miers and Matthew Green, BOLT is inspired by the Lightning Network, only that its approach involves ensuring payments on the same channel cannot be linked to each other, even by transacting parties. Also, transactions occur in milliseconds – without requiring block confirmation.

It will achieve this by utilizing two pieces of technology: blind signatures and commitments. Commitments allow users to hide the value of transactions. Signatures convince users to sign for transactions without recognizing which one they are signing for exactly.

Ripple and Lightning Network

Ripple_ Forex Academy

In August of 2017, Ripple, together with blockchain company BitFury, released a code that integrated the Lightning Network with Interledger. Interledger is a protocol by Ripple that enables transactions between different blockchains. This means not just blockchains like Bitcoin and Ethereum, but also private blockchains and traditional payment models like PayPal.

Ripple doesn’t really need a scalability solution – it can already process an impressive 1500 transactions per second. The network hopes to integrate LN technology for its atomic swaps function and to achieve compatibility between cryptocurrencies.

Ripple’s CTO Stefan Thomas illuminated on this while speaking to Coindesk, saying: “I shouldn’t have to care which particular coin you use or like. If you’re on PayPal and I’m on Alipay or if I’m on Bitcoin and you’re using a bank account, I’ll still be able to send you money and not worry about it. That’s the long term goal.”

Monero and Lightning Network

Just like ZCash, Monero is a privacy-oriented coin, meaning if it needs to use LN for scaling purposes, it will need to put in place some privacy features.

Still, it looks like Monero intends to utilize the Lightning Network for its atomic swaps technology and not so much for its scaling solution. There are also plans to work with Litecoin in a bid to use the Lightning Network into Monero and enable atomic swaps between the two blockchains.

The idea is to ultimately enable Monero users to swap their coins for any other cryptocurrency via LN in the future.

Neo and Trinity

The NEO platform is much like Ethereum in the sense that it provides a platform for developers to create DApps and for users to create smart contracts. As such, it needs a scaling solution to handle the massive traffic and take the strain off the main chain. This solution is called ‘Trinity’ and is still in the works. The solution will see the NEO network scale to new heights of scalability, seeing as it can already handle 1,000 transactions per second.

Stellar and Lightning Network

Stellar is a payment protocol for making fast, secure, and cheap transactions. As it is, the Stellar network can process up to 1,000 transactions per second.

Still, Stellar has announced plans to integrate the Lightning Network. Co-founder and CTO Jed McCaleb stated that this technology has the potential to improve scalability, privacy, and interoperability for the network.

Speaking to Bitcoin Magazine, McCaleb said: “We’re super excited about Lightning,” adding, “In order to keep the network efficient and stable, we need something like Lightning.”

Final Thoughts

The Lightning Network is a great solution for cryptocurrency networks to achieve scalability, more privacy, and cheaper transactions. When these blockchain networks finally roll out their LN solutions, they can go toe to toe with traditional payment systems, and users can expect a better experience.

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Crypto Videos

Legitimate Passive Income Streams In Crypto – The Pitfalls & Successes Part 5

https://youtu.be/LeiLMKTfFKg

https://youtu.be/LeiLMKTfFKg

Earn Passive Income in Cryptocurrency – part 5

This part of the Cryptocurrency Passive Income guide will talk about Lightning Network nodes, one of the ways that will become important in the future, even though they aren’t as profitable at the moment.

The Lightning Network

In order to be able to scale and handle mainstream adoption, Bitcoin has launched the lightning network, a side-layer solution that enables users to send cheap and fast payments and even make money. To be quite frank, the amount you can earn from running a lightning node at the moment is low. However, there is a possibility that this will be more lucrative in the future, which is why we are covering it.
Today’s average lightning network (LN for short) fee stands at about one satoshi, which is worth just a fraction of a cent. Though the profits are not what you are looking for from a passive income source at the moment, they could show how the network will develop as time passes.

Problems with the Lightning network

In order to run a lightning node, one would have to download Bitcoin’s entire transaction history, which is over 200GB of data. On top of that, you would then have to download the lightning software on top of that. However, 200 to 300 GB of storage might not pose a problem to some.
There are currently over 12,000 lightning network nodes, with the cumulative capacity of around 1 Bitcoin.

Fees on the LN will keep existing

While it is impossible to know how the market will adapt and evolve at this point, many developers believe that there are several beneficial reasons for allowing fees on the network, the main one being that people won’t “become” nodes out of the kindness of their heart, but rather because of financial incentive. If this is true, then the fees will match the requirements of the miners in terms of profits versus obligations towards the network.

Conclusion

While turning your device into a lightning network node is not profitable at the moment, it may become at some point. It is important to know many ways to earn passive income, but also to know what will be profitable in advance.
Check out our future parts of Cryptocurrency Passive Income to learn more ways of earning passive income with crypto.

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Crypto Guides

Lightning Network – A Potential Solution To Blockchain Scalability Issue?

Introduction

Introduction

Introduction

Cryptocurrencies that were in the boom a few years back are still in the business, and it is believed that their decentralized blockchain technology will keep them alive for a very long time.

The transactions on credit cards and debit cards are different from that of transactions on cryptocurrencies. VISA (a payment provider) processes about 4,000 transactions per second. In fact, it has a capacity of 65,000 transactions to process per second. But, a typical Bitcoin Blockchain, on the other hand, can process only up to seven transactions per second with a block size of 2MB. Hence, there is a clear issue of scalability. Also, the Bitcoin transaction costs are pretty high when compared to other traditional transaction methods. Thus, to solve this issue, the ‘Lightning Network’ technology came into existence.

What is the Lightning Network technology, and why do we need it?

The Lightning Network technology is a system that is used to process a transaction instantly. This technology was developed to send and receive payments instantly without any hassle and also to reduce transaction fees. In the next section, let’s see the backend of this technology.

Working of the Lighting Network Technology

⚡ A multi-signature wallet with some amount of Bitcoins is set up either by the sender or the receiver.

⚡ The public blockchain network keeps a record of the user’s wallet address and the balance sheet* (smart contract). This process is referred to as the payment channel.

*Balance sheet – An agreement that proves how much Bitcoin belongs to whom.

⚡ When the payment channel is wholly set, the parties can make any number of transactions without the involvement of the blockchain network.

⚡ On each transaction, the parties update their multi-signature wallet to keep track of how many Bitcoins were sent to whom.

⚡ So, basically, the balance sheet is the one that is always updated and not the blockchain network. A copy of this balance sheet is maintained by both parties.

⚡ Finally, when all the transactions are completed, the payment channel is closed. The most recent balance sheet is presented to the blockchain network for verification. And when the transaction is confirmed, the users receive their share of Bitcoins into their wallets.

The Interconnected Lightning Network

A great feature of the Lightning Network is the interconnection in the network. Let us understand this with an example. For instance, let’s say there is a payment channel between P1 and P2. And there is P3 who has a payment channel with P2. Now, if P3 wants to transact with P1, a separate channel need not be created between P3 and P1. P3 can send the coins to P2, and P2 can, in turn, send it to P1 and complete the transaction. Hence, making the Lightning Network interconnected.

The Present and Future

Presently, the proof-of-concept is being implemented on the Bitcoin Testnet. And an experimental implementation is being carried on the Bitcoin Mainnet. In fact, this technology has come into the real world in a few countries, and it ought to grow in the coming years. That’s about Lightning Network and its working. Let us know if you have any questions in the comments below. Cheers!

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Cryptocurrencies

Breaking Down SegWit – A step by step guide

SegWit is one admittedly complex concept in the blockchain world. Most crypto veterans probably still have no idea what it is or what it’s really about. And for those just

SegWit is one admittedly complex concept in the blockchain world. Most crypto veterans probably still have no idea what it is or what it’s really about. And for those just

SegWit is one admittedly complex concept in the blockchain world. Most crypto veterans probably still have no idea what it is or what it’s really about. And for those just now entering the blockchain sphere – it can be confusing even to begin wrapping your head around it.

Whichever the case, it’s essential to get it right – especially if you’re planning to interact with Bitcoin and other cryptocurrencies such as Litecoin.

The good thing is we help you take care of this in this article. So let’s discover what SegWit is, how it came to be, what it holds for the crypto market place, and more.

What is SegWit?

Segwit is the name given to a Bitcoin protocol upgrade developed in 2015 and implemented in August. 23, 2017. It was designed as a solution to the scalability of Bitcoin and other cryptocurrencies with a similar model, like Litecoin.

Bitcoin confirms a new block every 10 minutes, with each block only able to hold a certain number of transactions. Bitcoin’s block size is only 1MB – and this limits the number of transactions that can be confirmed for every block. As a result, the Bitcoin blockchain only processes an average of about seven transactions per second (TPS). This pales in comparison to other payment systems like Visa and PayPal, which handles 1700 TPS and 193 TPS, respectively.

SegWit’s bright idea is to increase the block size on the blockchain by removing digital signatures from transactions. When certain parts of a transaction are removed, it frees up space for more transaction throughput on the chain.

Segregate here means to separate, and witnesses are the signatures. So, SegWit is shorthand for “segregated witness,” which means to separate signatures from transaction data.

The SegWit idea originated with Bitcoin developer Pieter Wuille and was developed by him together with other developers, resulting in it being implemented as a soft fork in 2017 on the Bitcoin network. This upgrade brought a number of benefits for the blockchain network – including improving transaction speeds and increasing block capacity. It also solves the so-called transaction malleability issue – which we’ll discuss below, right after we deconstruct the ‘soft fork.’

What Is A Soft Fork?

Any software needs updates to improve its functionality or fix performance issues. In the cryptocurrency world, such updates or changes are known as forks.

A soft fork is a blockchain update that doesn’t split the chain into two.

In other words, a soft fork is an upgrade that is backward compatible with the previous software. A soft fork does not need nodes in the network to upgrade so as to follow the same network since all blocks on the ‘new’ blockchain follows the same consensus rules (a set of rules that all nodes usually enforce to validate a block and its transactions). In other words, a soft fork is backward compatible because old nodes will still recognize the new blocks on the upgraded blockchain.

A soft fork requires a majority of miners (nodes) to activate it so that it becomes operational. SegWit is one such type of a soft fork – it’s compatible with the old version of the Bitcoin blockchain.

What is Transaction Malleability, and Why is Fixing it Important?

Transaction malleability is a flaw in Bitcoin’s code that allowed bad actors to potentially change transaction signatures. Changing here means altering the unique ID of every Bitcoin transaction before it’s verified on the network. 

If someone tampers with a transaction signature, it could cause a transaction between two parties to be corrupted. Now, we know records on the Bitcoin blockchain are immutable, i.e., they can never be changed or altered. This resulted in invalid transactions being stored forever on the blockchain.

Signatures are the only way a transactions’ unique ID can be modified. SegWit came along and removed the need for a signature to be on a transaction. Even if someone alters the signature, the unique ID remains the same. The signature will still be checked, but this time not when calculating a transaction’s fingerprint, or identifier.  

SegWit’s Implementation Issues

After SegWit went live, its implementation was anything but immediate. Even today, the protocol is yet to be fully adopted by network participants. This is due to several reasons – including the different motivations of different users on the network. It’s also because it’s not mandatory, and some participants are okay with the original Bitcoin protocol.

Another reason is that there are different participants in the Bitcoin ecosystem playing various roles – so implementation of any new protocol is not exactly automatic. For example, the Bitcoin network relies heavily on wallets in which users will store their private and public addresses.

There are also crypto exchanges and other players in the ecosystem who need to upgrade their systems and hence ‘facilitate’ any changes in the network. For an upgrade to be adopted, all these organizations need to embrace it, and this doesn’t always pan out favorably.

A new software update would change the way transactions are carried out on the network. This might be good news for Bitcoin believers – but not necessarily for corporate interests. Consider, for example, the investment in billions of some of these companies. There is high motivation to maintain the status quo and not ‘rock the boat.’

There is also the question of wallets that were not able to support the protocol immediately. It took a while before some of the most widely used wallets – like Trezor and Wallet, could enable it.

There’s also the issue of miners. SegWit was designed to go live if a supermajority of miners signaled support for it. However, the larger portion of the miner community refused to activate the protocol. This is because SegWit was incompatible with a mining optimization software known as AsicBoost that they were using.

The miners’ refusal led to an interesting showdown. Bitcoin enthusiasts rallied around an idea called User Activated Soft Fork (UASF) – which meant they would activate the protocol on their own Bitcoin nodes if miners did not. The UASF would have split the Bitcoin network into two – one with SegWit and another without. The resulting outcome was not going to be favorable for anyone – which is probably why a few days before the UASF ‘deadline’, miners caved in and activated the protocol.

SegWit’s Adoption Challenges and Current Status

SegWit’s “backward-compatible” status, i.e., ensuring network participants who haven’t upgraded to it can coexist with those who have, means some participants have not been in too much of a hurry to adopt it.

Most Bitcoin-businesses, as well, would rather focus on customer acquisition than implementing not such necessary technologies. Rusty Russell, a blockchain developer at the blockchain company Blockstream, echoed this to the crypto news website Coindesk in 2018. He said that the priority for startups was “optimizing for growth and not implementing cool new tech.”

Implementing SegWit is also quite an involving task – both time-wise and financially. Founder of the crypto exchange Gemini, Tyler Winklevoss owned to this in a Reddit Q&A earlier this year. He said retrofitting wallets to accommodate SegWit was a “very tricky procedure” that required designing “a new hot wallet from the ground up.”

Nevertheless, SegWit has, over time, gained traction, thanks to Bitcoin increasing in value and a subsequent increase in transaction fees. For this, users are more inclined to use efficient, SegWit-enabled solutions. Businesses have noticed this shift and are now being forced to adapt.

For instance, in October of 2019, Bitcoin Segwit had reached usage rates of 56.82%, and Litecoin Segwit had hit 75%. These are encouraging figures that point to increased adoption of the protocol in the future.

Pros of SegWit

Solves the issue of transaction malleability

Facilitates faster transactions on the blockchain since waiting time is reduced 

Makes bitcoin transactions cheaper – faster transactions mean lower transaction fees

Helps Bitcoin and other cryptocurrencies achieve better scalability

Reduces the size of each individual transaction 

Helps new and exciting developments like the lightning network

Cons of SegWit

SegWit’s idea relies on eliminating some data off the blockchain. Some Bitcoiners believe keeping data off the blockchain is in itself a failure – like admitting the bitcoin model can’t stand on its ‘own feet.’

Miners now get lesser transaction fees for every individual transaction

SegWit’s implementation is a complex process that wallets have to do on their own. Some may not have enough resources to do it or may not get it right the first time

The implementation means more resources being used overall – owing to the increase in block capacity, transactions, bandwidth, and so on

The off-chain containing signature data will need to be maintained by miners as well. Unlike the blockchain where they get block rewards and a fraction of transaction fees, there is no reward for maintaining SegWit

Some in the Bitcoin community believe it’s a short term fix to a long term problem. They argue that it doesn’t really solve the scalability problem and that only changes to the blockchain size and changing how transactions are processed on the blockchain will really help Bitcoin to scale

The protocol has caused divisions in the Bitcoin community, leading to ‘forking wars,’ with the hard fork Bitcoin Cash resulting out of this

Conclusion

SegWit is a fundamental change to the Bitcoin ecosystem and one that sets the stage for further upgrades down the road. Removing the need to include identifying information on transactions on-chain brings several benefits such as more and faster transactions, fixing the thorny malleable transactions issue, and more.

But despite it being a promising, innovative solution – its adoption has been rather slow. Some people welcome it as an improvement to the world’s most popular cryptocurrency, while others think it highlights Bitcoin’s shortcomings. However, recent statistics show a marked improvement – something encouraging for its proponents. And from the current trend – its adoption looks set to go only forward. Let’s wait for what the future holds for both camps.

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Crypto Guides

What Is Adaptive Scaling In Cryptocurrency & How Is It Achieved?

Introduction
One of the most important motives behind the invention of cryptocurrencies is that they should have the ability to be an alternative financial system. That is, we, the users

Introduction
One of the most important motives behind the invention of cryptocurrencies is that they should have the ability to be an alternative financial system. That is, we, the users

Introduction

One of the most important motives behind the invention of cryptocurrencies is that they should have the ability to be an alternative financial system. That is, we, the users, should be able to use them just like how the fiat currencies are being used today, but with many more features and ease. While this thought is very ambitious, the journey has already begun with Bitcoin. The total market capitalization of all the cryptocurrencies combined is around $200 BN as of Dec 2019. 66.4% of this comes from Bitcoin alone.

No matter how many cryptocurrencies have come, the craze for Bitcoin didn’t decrease. As this craze was not anticipated during the inception of Bitcoin, the network had to endure scaling issues, i.e., the number of transactions processed per second. New age cryptos are handling scaling issues by incorporating advanced consensus algorithms. But the Bitcoin network wants to stick to the POW as 18 million Bitcoins are already mined out of the permissible 21 million.

Hence it is essential to make some changes to the Bitcoin network to increase its scalability. In this article, let’s see a couple of techniques that have been incorporated in the Bitcoin network to tackle this issue.

SegWit

SegWit stands for the segregation of witnesses. It is a protocol upgrade that changes the way data is stored in the blockchain network. SegWit was first implemented in Litecoin in May 2017, and later, very shortly, it is also implemented in the Bitcoin network by August 2017. Although the primary intention of this protocol is to fix a bug, the side benefit has taken much more significant importance. When the Bitcoin network started, each block size was limited to only 1 MB. As a result, only seven transactions were processed per second, which limits the potential of Bitcoin in the day to day transactions.

The signatures alone occupy 70% of this 1 MB data in the block. Hence it was proposed to eliminate the signature in the block and increase the number of transactions. By doing this, the number of transactions processed per second is increased while keeping the block size constant. This upgrade also enabled technologists to develop a second layer on the Bitcoin network, which allows smart contract functionality. It is named as the lightning network; let’s understand this concept in detail.

Lightning Network

Lightning network is essentially a system of smart contracts built as a second layer on top of the Bitcoin network. This network allows people to send/receive payments instantaneously with way lower transaction fees by keeping them off the main network.

Working

First and foremost, a payment channel must be set up using a multi-signature wallet. All the involved parties can access this wallet with their respective Private keys. The wallet address is then saved in the public blockchain network. The corresponding parties can make Bitcoin deposits to this wallet.

Once this is done, the parties involved can conduct an unlimited number of transactions without ever touching the main blockchain network. Every time the parties involved conduct a transaction, the balance sheet gets updated with the amounts each party holding.

Though the block size of the Bitcoin network has been increased to further cope up with the scaling issues, these were the two most favorable measures taken at the time when needed to make Bitcoin desirable for day to day transactions. We hope you understood the concept of adaptive scaling in a blockchain network. Stay tuned for more interesting crypto content. Cheers!

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Cryptocurrencies

Is The Lightning Network Bitcoin’s Cure-All?

Scalability was always a thorny issue for Bitcoin since day one. When Satoshi Nakamoto first proposed the cryptocurrency, the very first comment by James MacDonald featured this comment “We very

Scalability was always a thorny issue for Bitcoin since day one. When Satoshi Nakamoto first proposed the cryptocurrency, the very first comment by James MacDonald featured this comment “We very

Scalability was always a thorny issue for Bitcoin since day one. When Satoshi Nakamoto first proposed the cryptocurrency, the very first comment by James MacDonald featured this comment “We very much need such a system, but it does not seem to scale to the required size.” A decade later, scalability is a concern that the Bitcoin and other mainstream cryptocurrencies have to grapple with.

What exactly is scalability? Well, Bitcoin has only ever been capable of processing an average of 7 transactions per second (TPS). This was okay at the beginning, but as the cryptocurrency gained more use and acceptance, congestion on the network increased. As a result, transactions took longer to be processed, and transaction fees went up.

If Bitcoin has any hopes of becoming a fully viable alternative to current payment systems – let alone the ‘world’s currency’ – as many Bitcoin believers envision, it will need to solve the current salability issues it faces.

To put this into perspective, compare Bitcoin’s current meager 7 TPS and Visa’s average of 1700. In the face of this dismal scalability potential for Bitcoin, the cryptocurrency’s enthusiasts have been hard at work reimagining the system and how it can be improved. There is one proposal that has caught the attention of the Bitcoin community and one which holds potential. This is the Lightning Network.

What is the Lightning Network?

The Lightning Network (LN) is based on this premise: there’s really no need to record every single transaction on the blockchain. As such, LN is a second layer technology on Bitcoin’s blockchain that allows two users to use a micropayment channel between each other – with the hopes to scale Bitcoin’s transaction processing.

By removing transactions from the main blockchain, LN is expected to remove the backlog of transactions and reduce or get rid of transaction fees altogether. It will drastically speed up transactions, positioning Bitcoin for everyday use.

How Does the Lightning Network Work?

The Lightning Network comprises an off-chain layer on Bitcoin’s blockchain. It features multiple payment channels that allow two parties to open a payment channel and conduct transactions between them. Two users can open a payment channel that will allow them to shift funds back and forth between their wallets.

These transactions are processed differently from the standard transactions on the main blockchain, being only updated there once the two parties open and close a channel.

To open a payment channel, the two users need to set up a multi-signature wallet and deposit some funds into it. This is the first transaction, and it’s called the funding transaction. Funds stored in the multi-signature wallet can only be accessed upon both (or more) parties providing their private keys. This means a party can only access and/or spend the funds with the consent of the other.  

The two users can conduct unlimited transactions between themselves without having to let in the main blockchain on their activities. This approach considerably scales up transactions’ speed since they don’t need to be approved by all nodes on the blockchain network.

The private channels between parties combine to form a web of lightning nodes that can channel activity among themselves. This web, or network, is the Lightning network.

The ingenuity of the Lightning Network is that once it achieves mainstream acceptance, users will not have to open a new channel to interact with others. They will be able to transact with ‘new’ users via existing channels – that is, channels with users with whom they already have a relationship. The network will execute this by automatically finding the shortest path.

Finally, the Lightning Network is being tested for another exciting feature – the ability to conduct cross-chain transactions of crypto swaps – that is, being able to exchange one crypto to another. This may render crypto exchanges – as we know them, obsolete.

Will You Pay Fees for Using the Lightning Network?

Yes, users will be required to pay fees on the Lightning Network. The fees will comprise routing charges for routing transaction details between lightning nodes, plus Bitcoin’s transaction fees to open and close payment channels.

At the moment, there are zero fees on the network owing to very few lightning nodes. However, if the project succeeds, charges are set to increase, but only slightly. In any case, if the fees became too expensive, a user has the option to move back to the main blockchain.

Implementations of the Lightning Network

The concept of LN was first proposed by Joseph Poon and Thaddeus Dryja in 2015. Currently, there are four major teams developing the concept.

Each is operating on the BOLT specification – which allows them to connect with each other as a unified network rather than separate groups competing with each other. The BOLT specification has been developed by the blockchain technology companies Block stream, ACINQ, and Lightning Labs – to allow each company’s products to interact with the others. These are the implementations and groups behind LN’s current exploration:

1. C-Lightning

C-Lightning is being developed by Blockstream. It’s coded in the C programming language and is created to only operate on Linux, with the possibility to run on Mac if you modify some coding and parameters.

This implementation supports lightweight nodes that you can run from the computer chip Raspberry Pi, allowing you to connect with other users without necessarily being online. As such, people can more conveniently adopt and contribute to the LN.

C-Lightning also features a wallet that lets you manage funds, whether online or offline.

Another exciting feature of C-Lightning is you can transact anonymously over the TOR network, so you don’t have to worry about privacy issues.

2. Éclair

Éclair is being developed by ACINQ, a French company. It’s very much like C-Lightning, with the only differences being in the coding and user interface. You can operate Éclair on Windows and also with the Raspberry Pi acting as the network node.

Éclair also has a mobile wallet for Android that you can use as a regular Bitcoin wallet and the Lightning Network for cheap and instant transactions. However, it’s advisable to not send large amounts of crypto on the wallet as its development, just like the Lightning Network, is yet to go mainstream.

Éclair is also compatible with C-lightning and Ind, another LN implementation that we’ll look at next. This means users can connect with another user(s) on either network.

3. Lightning Network Daemon (LND)

LND is under development by Lightning Labs. It’s written in the Golang programming language and can run on Linux and Windows. It’s compatible with both C-Lightning and Éclair as well as the Litecoin Lightning Network.

LND also features a desktop wallet that allows users to open a payment channel and shift funds between each other.

4.Lit

Lit is being developed by the Massachusetts University of Technology under their Digital Currency Initiative. Lit functions fairly the same as the other LN implementations, except it’s designed to support all SegWit coins as well, including those that may be developed in the future.

However, Lit does not support interoperability with the other LN implementations since it supports more coins than indicated by the BOLT specification.

MIT is currently developing a solution known as LitBox that will allow users to conduct transactions without needing to be connected to the internet.

Lit is also currently developing a multi-hop routing channel, the lack of which has made it lag behind other LN implementations. Since Lit is being developed by a small, non-commercial-driven team, its progress is slow, and at the moment, it has little real-world utility.

Benefits of the Lightning Network ;

The Lightning Network is still actively in development. The concept looks great on paper, but whether it will work as envisioned remains speculative at this point. If the network were to succeed, Bitcoin users can expect several upsides coming with it. Here are some of them:

Faster transaction speed. You can expect transactions to be much faster, thanks to the elimination of the need for validation of all nodes in the network. Also, this will be a massive step for cryptocurrencies’ ability to compete with the current financial set up in payment processing.

Transaction fees. LN developers and enthusiasts are banking on the network to contribute to the reduction or elimination of transaction fees, as transactions will be chiefly taking place outside of the main blockchain.

LN may prove suitable for micropayments – like paying for coffee, drinks, shopping, and so on. This is because it has an ideal environ for the transfer of small currency values. Also, it will allow for transactions to take place between devices without the need for human intervention, which reduces error and saves time.

Scalability. This is the most anticipated solution of the LN – which is touted to potentially facilitate at least 1 million transactions per second.

Atomic swaps. Provided that two blockchains feature the same cryptographic hash function (and most do), users will be able to send funds from one blockchain to another without the need for an intermediary. This is not just cheaper, but faster.

Security and Anonymity. The LN technology might be the thing to finally bring true anonymity to cryptocurrency. The majority of cryptocurrencies, including Bitcoin itself, are pseudonymous – meaning you can conduct transactions without revealing your identity, but transactions can still be traced back to you. LN will enable transactions to take place off-chain, making them impossible to trace.

Problems with the Lightning Network

The lightning network is a technology that’s still being explored. As such, it still experiencing ‘teething’ problems. The following are some of them.

Lightning networks are meant to be decentralized, like the blockchains, they aim to improve. However, they could instead lead to a centralized network that characterizes the traditional banking system in which banks and other financial organizations regulate transactions. Influential businesses will have more open connections than other users, resulting in their lightning nodes being centralized hubs on the network. And failure at such a hub could feasibly crash the network.

LN does not really solve the transaction fee problem. Bitcoin fees will undoubtedly rise in the future, Lightning Network or not. If these fees increase, LN will be rendered obsolete as it would become cheaper to transact on the main blockchain. Thaddeus Dryja admits as much: “Bitcoin’s transaction fees could go up again and hinder the lightning network’s adoption among merchants.”

Lightning network nodes are required to be connected to the internet at all times to facilitate transactions. This renders them vulnerable to hacks and thefts. Also, offline storage, which is the safest for cryptocurrencies, is not possible on a lightning network.

Going offline would present a new set of problems for the Lightning Network, like the Fraudulent Channel Close. The fraudulent channel close means one party could easily close a payment channel and take crypto funds for themselves when the other is away. Although there’s a given window of time when the other party could contest the closing of a channel, it could expire if either party is offline too long.

The “centralized” inclination of the lightning network means funds are concentrated in specific nodes within the network. In a scenario when such a node went offline, it could lead to a downtime of the entire network, cutting off user’s access to their funds.

To open and close a payment channel, you need to do so on the main Bitcoin blockchain. This requires manual work and yet more fees.

When is the Lightning Network Coming?

The cryptoverse is eagerly awaiting this groundbreaking technology to fully come into form. It’s worth noting the concept targeted Bitcoin at first, but it’s currently being explored for more cryptocurrencies, including Zcash, Litecoin, Stellar, Ether, Ripple, and more.

So far, Bitcoin has been tested on Éclair and LND networks with success. It’s also a good sign that the Lightning Network’s specifications have been published. This means developers can apply the rules and implement LN in their preferred programming languages.

Still, the technology is very much in its nascent stages. As of now, the average user cannot really send and receive payments via the network. Moreover, the implementations are still being dogged by bugs – leading developers to warn users not to send real money over the network – yet.

It’s important to note that the technology’s code is very complex and requires rigorous proofing. If the Bitcoin community, and indeed the whole world, is to adopt the technology, it must prove to be safe, reliable, and a veritable upgrade from the blockchain.

Currently, there is no official launch date for the Lightning Network, with each implementation taking a different approach. With that, experts predict that the network may take from several months to two years before going live.

Conclusion

The Lightning Network sounds exciting. It has the potential to improve Bitcoin and the entire cryptocurrency market as we know it. Think instant payments, anonymity, and reduced fees – LN could herald a new beginning for the crypto ecosystem.

However, Bitcoin and crypto fans have a while to wait before the technology can really live up to its promise. It also remains to be seen whether it will live to the promise, to begin with. We can only wait to see what exciting developments and updates the implementations have in store.