The two highly anticipated improvements to Bitcoin’s fees and scalability are stuggling to gain adoption. Their growth rate is far below what most people expected and they struggle to make headway. In addition, their slow progress is having a hindering effect on the market. Designed to enhance efficiency and provide scalability, both upgrades have failed to make any significant impact on the adoption of Bitcoin. SegWit was activated on August 23, 2017 and the Lighting Network (LN) went live on March 15, 2018. They were supposed to boost the network’s performance and drive adoption forward. However, they’re encountering headwinds due to the (coding) changes required, the lack of incentives for using them, and the few advantages obtained in return.
SegWit or segregated witness is a soft fork of the Bitcoin blockchain. It’s a modification that removes multisig data from each block freeing up to 65% of each block’s space. This makes transactions smaller and block size larger – from 1 to almost 4MB. The Lighting Network is a second layer, off chain solution, that creates bidirectional payment channels for the Bitcoin network. This allows for recurring transactions like B2B to be done off chain allowing for faster on chain transactions. The implementation of both protocols will scale up Bitcoin speeds exponentially. Unfortunately, despite the clear advantages of improving Bitcoin, adoption has been slow and underused.
According to OXT.me, a blockchain analytics service, only 36% of all Bitcoin transactions currently use SegWit. Implementation is slow because the efficiency savings are not significant enough to justify the trouble and costs asscociated with reprogramming existing systems. In addition, the current costs of Bitcoin transactions have decreased considerably, so investors don’t mind paying more so long as no changes are required. Similarly, miners opposed SegWit because the new ASICBoost software conflicted with it. Lastly, businesses continue to use the older version of SegWit called “Pay to Script Hash” (P2SH) and are reluctant to change. Tyler Winklevos once reasoned that switching to the new version would practically require “to build a hot wallet from the ground up.”
The Lighting Network is faring much better but at a cost. A year after its launch, it has 2,800 nodes; almost one third the amount of nodes of Bitcoin. However, as impressive as that figure may seem, the statistics don’t tell the whole story. The majority of nodes (64%) are owned by a single entity (LNBIG.com); only 20 nodes owned by LNBIG control most of the network capacity. This is a fundamental flaw that runs contrary to decentralization. Fortunately, the current version of the LN is still in Beta stage and implementation is only beginning. Therefore, as more nodes join the network, this problem will diminish.
In addition, implementation still requires technical skills outside of the average user’s capacity. Setting up payment channels requires setting up a virtual private server, creating a node, a Bitcoin wallet, and funding the wallet. There are additional steps like configuring software and negotiating with online stores. Therefore, until this changes, mass adoption will depend on intermediary crypto payment services like OpenNode or Coingate.
SegWit and LN represent a tremendous improvement to the scalability of the Bitcoin network. They are key to micropayments and instant settlements. Unfortunately, the technical aspects form a barrier to rapid adoption. But as all new technology, it will take time to improve and develop into an user friendly interface. For now, scaling solutions are still in an early developmental stage. And as the market improves, these upgrades will provide value and reduce costs.