Several Lightning Network developers have released a paper titled ‘eltoo: A Simple Layer 2 Protocol For Bitcoin’ that outlines improvements to Bitcoin’s latest scalability upgrade, Lightning Network. Christian Decker and Rusty Russel from Blockstream as well as Olaoluwa Osuntokun from Lightning Labs co-authored the paper.
eltoo is derived from the pronunciation of L2, an acronym for layer 2, which stands for layer 2 Bitcoin protocols like the Lightning Network. The Lightning Network allows for Bitcoin transactions in fractions of a second, possibly facilitating millions or billions of transactions per second in the future, far more than Visa.
It does this by conducting almost all of its transactions off chain. Only the transaction opening a lightning payment channel and the transaction closing a payment channel are stored on the Bitcoin blockchain. This massively reduces blockchain data bloat, and is necessary technology to keep Bitcoin transaction fees low in the future, and therefore essential for Bitcoin being useful as an everyday currency in the long term.
The operational Lightning Network was released in December 2017 and there are already thousands of lightning payment channels open, and that number is growing quickly, indicating it is on track for global adoption.
The Lightning Network isn’t perfect, however, and eltoo has been developed to improve some of its problems. eltoo condenses the amount of data users need to store by saving only the most recent off-chain transaction data. This reduces the storage space required by users versus the Lightning Network, which requires so much data it is difficult to download and run.
More importantly, getting rid of older off-chain transactions deletes toxic information. If a user loses their device that is running the Lightning Network and they restore an older state of their Lightning Network transactions they could lose their money as a penalty. With eltoo, only the freshest state is stored which fixes this problem and keeps user Bitcoins safe.
Also, eltoo will allow transaction fees to be added at the time a payment channel is closed and settled, unlike the current Lightning Network which requires fees to be decided on when a payment channel is opened, possibly months or years before the settlement transaction. This could lead to drastic overpayment or underpayment of fees, leading to spending too much money on the fee or a transaction that gets stuck in the mempool for a long period of time.
Before eltoo can be implemented, Bitcoin must be forked to include SIGHASH_NOINPUT in its protocol, which allows any transaction input to be bound to a transaction output with the same script. This connects the final settlement transaction to the transaction that creates the payment channel without saving any of the intermediate states, a key aspect of eltoo. Of course, forking Bitcoin is extremely controversial, and it remains to be seen whether the SIGHASH_NOINPUT fork that eltoo requires will ever occur.
Eltoo is not meant to replace the Lightning Network, rather it can be added to the stack of protocols that comprise the Lightning Network and has backwards compatibility.
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