We all hear about segwit and what coins have activated it recently, but what is it, and is it really helpful? Does it add value to bitcoin or other coins? What can you do with it? Is it secure? Does it lead to centralization? These are the main points of contention with second layer projects and we will discuss, in short, the reason for these solutions and the myths surrounding them.
When we hear segwit a lot of people instantly think of the lightning network when in fact lightning network is just one solution using segwit to create a second layer solution. These second layers can be thought of as running along side bitcoin and checking in with the main blockchain every once in a while to make sure they don't have any discrepancies. This actually helps blockchains like bitcoin not get too bogged down with every tiny transaction and allows wallets to trade many transactions before bringing them to the blockchain as one big transaction. There are claims that anything not run on the blockchain is not as secure. This may be slightly true but I am of the opinion that blockchain is too secure. Is there a such thing? I believe so. If you are buying a coffee and you have 50$ tied up in your lightning network wallet it is still almost impossible for anyone to steal those funds without signing the transactions as you and then cashing out to the main blockchain. Do you really need the full power of the mining network to verify every time you paid 5$ for a cup of coffee? Or is it more convenient to store up many coffee purchases with the risk that maybe 1 or 2 did not go in your favor and have the option to cash out when you want? Perhaps the coffee was too cold or you don't want to deal with a particular shop anymore. You just cash out the coins in your open channel and the blockchain records them as being in your wallet. Anything both parties signed for is transacted and you are free to part ways. This is analogous to what we do in our everyday lives. We transact and make agreements everyday. If there is a dispute or someone doesn't hold up their end of the bargain, we go to court. The court represents the blockchain. It is costly to go to court but it is super secure and absolute. The transactions we do everyday represent second layer solutions. Many transactions can be made and then taken to court to make them official when we want to solidify them or if we have a dispute. This costs us a lot less in lawyers (miners) fees. This is the most popular and widely talked about example of a second layer solution.
Smart contracts are another. I'm not going to go in depth on smart contracts except to say that they are pieces of code that can be recorded and executed when certain requirements are fulfilled. These pieces of code can reside on the blockchain so that you know your agreement is secure and that the code will successfully execute the way it was agreed upon at the time of signing. This is very useful for allowing two parties to agree on terms of payment without needing a third party to hold the funds for them.
Atomic swaps are another second layer solution. Atomic swaps allow one coin to be directly transacted for another based on an agreed upon exchange rate. That means I could pay someone in bitcoin and they could choose to receive it as litecoin. This has huge implications when it comes to the roll of exchanges and how people currently trade.
Now that you have a general idea of what second layer solutions can do, can you see how helpful they are?
When we hear segwit a lot of people instantly think of the lightning network when in fact lightning network is just one solution using segwit to create a second layer solution. These second layers can be thought of as running along side bitcoin and checking in with the main blockchain every once in a while to make sure they don't have any discrepancies. This actually helps blockchains like bitcoin not get too bogged down with every tiny transaction and allows wallets to trade many transactions before bringing them to the blockchain as one big transaction. There are claims that anything not run on the blockchain is not as secure. This may be slightly true but I am of the opinion that blockchain is too secure. Is there a such thing? I believe so. If you are buying a coffee and you have 50$ tied up in your lightning network wallet it is still almost impossible for anyone to steal those funds without signing the transactions as you and then cashing out to the main blockchain. Do you really need the full power of the mining network to verify every time you paid 5$ for a cup of coffee? Or is it more convenient to store up many coffee purchases with the risk that maybe 1 or 2 did not go in your favor and have the option to cash out when you want? Perhaps the coffee was too cold or you don't want to deal with a particular shop anymore. You just cash out the coins in your open channel and the blockchain records them as being in your wallet. Anything both parties signed for is transacted and you are free to part ways. This is analogous to what we do in our everyday lives. We transact and make agreements everyday. If there is a dispute or someone doesn't hold up their end of the bargain, we go to court. The court represents the blockchain. It is costly to go to court but it is super secure and absolute. The transactions we do everyday represent second layer solutions. Many transactions can be made and then taken to court to make them official when we want to solidify them or if we have a dispute. This costs us a lot less in lawyers (miners) fees. This is the most popular and widely talked about example of a second layer solution.
Smart contracts are another. I'm not going to go in depth on smart contracts except to say that they are pieces of code that can be recorded and executed when certain requirements are fulfilled. These pieces of code can reside on the blockchain so that you know your agreement is secure and that the code will successfully execute the way it was agreed upon at the time of signing. This is very useful for allowing two parties to agree on terms of payment without needing a third party to hold the funds for them.
Atomic swaps are another second layer solution. Atomic swaps allow one coin to be directly transacted for another based on an agreed upon exchange rate. That means I could pay someone in bitcoin and they could choose to receive it as litecoin. This has huge implications when it comes to the roll of exchanges and how people currently trade.
Now that you have a general idea of what second layer solutions can do, can you see how helpful they are?
Besides the value it adds, there are some who claim that second layer solutions, like the lightning network, are scams attempting to take the user away from the security of the blockchain. I do not see them in this light. While it is possible for lightning network nodes (computers running the lightning network) to consolidate over time this is also true of mining nodes (computers recording the blockchain). I see these second layers as a reaction to slow transaction speeds, high fees, and miner consolidation. If anything, it allows for more than one solution to pop up and be used on the same coin, adding value to that coin, and allowing it to grow. There are others who claim that if you use a second layer solution you have no control over your funds. This couldn't be any further from the truth, and in most cases, this stems from a misunderstanding of how the network operates.