The centralized nature of the United States banking and monetary systems has caused the United States dollar to devalue 96.3% since its creation. Policies such as fractional reserve banking and quantitative easing has allowed the M1 money supply to almost triple in 2021 alone.
“Trusted” banks under the Federal Reserve have been able to spawn and spend credit like fiat currency and low interest rates don’t match market time preferences. This monopoly on the creation of money and monetary policy was the impetus for Bitcoin’s creation.
Critical to the development of a just money system is a decentralized currency. In early 2009, the solution proposed was Bitcoin: an open source protocol which allowed users to be able to quickly and inexpensively move value via the internet. Since then, Bitcoin has gradually been adopted by many of the world’s governments, institutions, and people. However as it is now, Bitcoin cannot handle such large scale use as it cannot process transactions fast enough.
The current protocol for BTC only allows for 1MB of data per block mined. This means that if the global economy were to move into a “Bitcoin standard”, only 7 transactions would be able to be processed per second (or 3,500 per block). We need around 15 thousand transactions per second.
One proposed solution to this problem is to change the block size to accompany more transactions. Bitcoin forks like Bitcoin Cash and Bitcoin SV change block sizes based on market demand while BTC remain stagnant.
On one hand, increasing the block size would enable Bitcoin to compete with fiat currency payment processors like Visa and Mastercard but on the other hand the increased rate of data being recorded on the blockchain would make the ledger would take up more disc space.
Increasing the block size would violate the most basic principles of the consensus algorithm as a larger file size may be implausible for smaller nodes to run. In turn, nodes and miners on the Bitcoin would be institutionalized and hence more centralized.
A Network Layering Solution
Rather than altering the protocol of a given cryptocurrency like Bitcoin (BTC) or Ether, an off-chain solution is required. To achieve global scalability, a network layer can be implemented. The network layer can host transactions from any digital transactions with final settlements occurring on the currency’s blockchain. This way, no cryptocurrency’s protocol must change and all cryptocurrencies can be hosted on a single network. Visa-level transaction processing can be achieved whilst cryptocurrencies can remain true to their original protocols and not fork.
However, traditional networking usually corresponds to large servers and centralized nodes. So how is this solution truly decentralized?
The network layer proposed is a peer to peer network meaning rather than each node communicating with a central server, nodes communicate with each other through communication channels. Network data is then stored on each node similar to how cryptocurrencies store their protocols on each node.
With that being said, there is no risk of a 51% attack where a single node claims the majority of power in the network as the transactions between two nodes are not stored on any other nodes. If you are participating in the network, you are secure.
Since transactions are not publicly announced, they must be stored on local nodes. That means that only you and the other end of a payment channel can write transactions. That being said, any transaction may be broadcasted by the sender of a transaction at any time.
In this way, the network protects against double spending as no two outputs are the same and any matching outputs will be publicly broadcasted and denied completion.
To actually exchange cryptocurrency between nodes, funds must be put into a P2SH multi-sig address. Multi-sig addresses are cryptocurrency “wallets” that can only spend funds if two (or more) private keys are inputted and if the address is confirmed on-chain.
Think of it as proof of reserves using cryptocurrency as collateral.
These private keys are derived from both ends of a transaction. However this poses the question as to what happens if a party is not willing to comply or goes offline completely.
This is where Hashed Time Locked Contracts (HTLCs) come in. An HTLC is a type of smart contract that sets up multi-sig addresses to return funds back to their original wallets given a certain amount of time.
For instance, if you put $10 into a mutual multi-sig address and I never once give up my private key, after a certain amount of time, you’ll be refunded.
The HTLC uses a Check Sequence Verify (CSV) time lock meaning the “refund time” is relative to the multi-sig address opening. It’s also important to note that these CSVs can be set to any time that the nodes agree on.
By using an important concept in the Tor network called onion routing, nodes can easily interact with each other without needing to set up a direct multi-sig address between them. With onion routing, nodes can use already set up connections to navigate across the network to a target node.
By encrypting the message/cryptocurrency, a nodes can send cryptocurrency across other nodes without them being able to steal or spend it. This is because the encrypted data packets jump from node to node randomly, re-encrypting the data every node, and only allow for encryption to be seen one layer, or node, backwards.
To increase the efficiency of such a network where onion routing can lead to any target node, bi-directional payment channels between nodes must be implemented.
For the entire history of the internet, single direction payment channels have been used. However, if both parties agree, a bi-directional payment channel can be used publicly. Although they will likely be used mostly for micropayments, these channels can handle any amount of cryptocurrency traffic so long as they are set up properly.
First, both parties send an equal amount of bitcoins to a multi-sig address. Then, both parties create a conjoined private key and share the hash of the key. The first party can open the address but the second party needs to wait for CSV timer. The first party can now sign their private key and interact with the address, but only the second party can spend it. It’s only when the channel is closed that the second party signs off on the address.
All of the transactions that go through the bi-directional payment channel can be re-written as a single transaction and settled on the blockchain.
But as we do in any network, we must assume that third parties with these payment channels set up are not looking to “play fair”. To combat this, a fee is charged to both the sender node and target node for each node the encrypted data is routed through.
Node protection plays a massive role in the success of a globally used network. Because the network will host potentially trillions of dollars in volume each day, it will be a target for all of the world’s hackers and cyber-attacks. As classical RSA encryption relies heavily on the fact that computers can not easily find the prime factorization of large numbers, the rise of quantum computing (specifically Shor’s Algorithm) means that a new cryptographic system will eventually need to develop.
Data packets moving through channels will be encrypted under SPHINCS+ as its hash signature type and ability to reclaim disc space will keep local node storage space relatively clean. With all of that being said, the blockchains themselves that these transactions are being settled on are not currently quantum-resistant and it is up to their participants to agree to fork into a more secure protocol.
The important thing to know about the network is that it is a multi-chain solution. That means that any cryptocurrency can be exchanged and spent on the network so long as participants are willing to deal in them. HTLC multi-sig addresses cannot differentiate between data so any hashed token can be transferred.
As cryptocurrency is further adopted and used in our every day lives, digital microtransactions will be recorded around the world in the trillions per day. Everything from buying a coffee to buying fuel from a carbon capture will need to be validated and updated on a decentralized, fair platform. The first users of the platform will be in areas with a large presence of both cryptocurrencies and a digital economy but also with the need of a better money system.
In Nigeria, many civilians are beginning to adopt cryptocurrency and use it for day to day trade. 32% of Nigerians use BTC. As that number increases and spreads across the world, the need for more processed transactions per second will become apparent.
By 2025, countries that have >25% BTC adoption rates like Nigeria, Singapore, and Isle of Man will be using the network.
By 2030, 99% of all bitcoins will be mined and the network will be used for all digital cryptocurrency transactions across the world.
Ten years from now, cryptocurrencies will be used commonly for the day to day person. Trillions of dollars of transactions will be routed through the network. If you spend money, you will likely be using a network layered solution to the cryptocurrency scalability problem. My goal is to build that platform so that becomes a reality.
- Build a payment network
- Settle transactions on the blockchain
- Grow the network globally