Intro

Bitcoin’s usage growth over the past decade has been strong and steady. On this journey, from its humble beginnings, Bitcoin has progressed through several phases of differing usage. Starting as a worthless geeky collectible, it soon moved to a niche instrument of speculation, before graduating to its more recent and increasing use as a store of value, or digital gold. Such progressions inches Bitcoin ever closer to the final and most valuable use case: A global and widely used new form of money.

However, widespread usage of bitcoin as money requires it to be useful as such. For bitcoin to reach its final monetary form, it is not sufficient to be a store of value alone (as is currently the case with gold), it also needs to be a viable medium of exchange. As we will see, this is a peculiar challenge for a decentralised payment system.

Bitcoin was designed to reliably settle peer-to-peer transactions without reliance on any third party. To achieve this, it purposefully prioritises security and settlement finality at the expense of transaction scalability. All decentralised systems face this dilemma as there exists an inescapable tradeoff between decentralisation and scalability at the blockchain level. Take note of that last distinction as it is an important concept to grasp when investigating how scalability can still be achieved in decentralised systems using layering. We’ll return to that in a bit.