A Beginners Guide To Segwit Bitcoin and The Lightning Network

 

When you send Bitcoin to someone, whether it be an exchange/wallet or to buy something, you need to pay a fee to send it. In early 2017 these fees were minimal, less than $1. But in December 2017 and going into 2018 average fees are now $20+, reaching as high as $60 in many cases.
 

This guide will go through two upcoming technologies, Segwit and Lightning Network, which allow Bitcoin payments to have much lower fees.

 

What are Transaction Fees?

If you're very new to Bitcoin, picture it like a chain, where each element in the chain is called a 'block'. Each of these blocks is finite, has a limited size. When you send money on the Bitcoin network, you're adding a new transaction to a block. Each of these blocks in the Bitcoin network is 1MB.
 

The maximum capacity of transactions on the Bitcoin network is determined by this block size. The current size, 1MB, limits the network to between 3.3 to 7 transactions per second. If the number of payments being sent is higher than this, they can't be processed immediately and have to be added to a later block. The transaction fee determines the order that payments are processed, where a higher payment would be processed quicker. The effect of this is that as more payments are sent, people pay more money to get their money through fast, leading to the fee getting higher as demand for sending money increases.
 

As of writing this there are 62,767 transactions waiting to be processed. Given 7 can be processed maximum per second, if everyone stopped sending money, it would take around 2 1/2 hours to clear all of these transactions - but because of demand, the number of outstanding transactions hasn't dropped below 1,000 since October. To get a transaction sent within 10-20 minutes right now, on the 21st January 2018, it could cost around $65. Even then, the person you're sending it to might wait 6 blocks before trusting the transaction, so you're paying $65 to wait an hour for your purchase or trade to be recognised. If you compare this to the speed and cost of centralised fiat payments or altcoins like Ripple, then it's not competetive at all.
 

Many technologies have been developed to solve this problem, and two in particular are looking very promising, Segwit (which stands for 'Segregated Witness') and the Lightning Network.

 

What is Segwit (Segregated Witness)

Segwit's approach to increase the capacity of the bitcoin network is to move transaction signatures from the beginning of a Bitcoin transaction to the end, and to weigh them differently compared to other data against the size limit. This is where the name comes from; segregate means to separate, a witness is what signs the transaction signature (e.g. separating the transaction signature). See this video if you're interested in technical details.
 

Segwit has several other benefits too:
 

  • Adds several security improvements to the Bitcoin blockchain.
  • Has higher capacity, so if all payments were sent on Segwit they'd be faster and have lower fees.

 

Segwit is not a permanent solution to Bitcoin's scaling problem, but in theory it would double the current capacity. If the network continues to grow then the same congestion issues will eventually be encountered again.

 

What is the Lightning Network

The Lightning Network is very different to Segwit. It proposes using smart contracts to create payment channels that only have to sync with the blockchain after a fixed amount of time. e.g. multiple payments might be processed off the blockchain, then all of them added in one blockchain transaction. This raises security concerns about users creating fake payments - which is why Segwit also needs be implemented (as it solves this security issue). Often Segwit and the Lightning Network will be discussed in the same threads because of its reliance on Segwit. See this video if you're interested in technical details.
 

Benefits of the Lightning Network:
 

  • Transactions sent over the Lightning Network are much faster than even Segwit.
  • Reduces congestion on the main Bitcoin network.
  • Allows users to not require direct channels between each other as long as they have an open path via other users.

 

A downside of the Lightning Network, and Segwit, is that technically they're quite complex - so the learning curve for developers and even users is much higher than the current Bitcoin network.

 

Where can you use Segwit Bitcoin?

Using this list of services preparing Segwit adoption, below are some wallets, exchanges and mining pools currently supporting Segwit:
 

Wallets
 

 

Exchanges
 

 

Mining Pools
 

 

Where can you use the Bitcoin Lightning Network?
 

The Lightning Network is in much earlier stages than Segwit, and so currently the only known vendor to accept Lightning Network transactions is the VPN provider TorGuard. They made this announcement via Twitter, where you can contact their support and choose to send a payment via the Lightning Network. As a first adopter of the Lightning Network we think TorGuard should be praised for this, as they're putting their reputation on the line.

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Source (with possible updates)