Learn Crypto tries as much as possible to explain concepts in simple language, but reading the headline of this article, you might feel that we’re failing in our mission.
If you’ve followed this section on the Basics of Crypto sequentially you’ll know that Bitcoin is a new form of internet money which is digitally scarce. That scarcity makes it an excellent store of value. So far so good,
But for it to become a widely used form of money – used for everyday purchases – it also needs to be as fast and convenient as the contactless options we are used to.
Unfortunately, Bitcoin out of the box cannot do this, because of something called the Bitcoin trilemma, which has been already introduced
The trilemma highlights the difficulty of accommodating the three ideal aspects of a blockchain-based money system –
- Security
- Scalability
- Decentralisation.
Fiat currencies have traditionally sacrificed decentralisation to provide security and scalability in a highly centralised manner; which creates problems of accountability and trust (see the 2008 Financial Crisis).
Bitcoin can provide security and decentralisation but at the cost of scalability. The bitcoin blockchain can currently only process around five transactions per second, when Visa processes thousands of transactions per second.
The term Layer 2 simply refers to the idea of building functionality on top of Bitcoin’s blockchain, to solve the scalability part of the trilemma; the Lighting Network is a specific Layer 2 solution, focused on speeding up payments and competing with the likes of Visa.
Let’s zoom in to understand exactly how you can build on top of Bitcoin – via Layer 2 – and explore the fundamentals of the Lightning Network.
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