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As bitcoin comes off its record high, the next step is to avoid a 'lightning fork'

  • The bitcoin community is awaiting the next big development called the Lightning Network.
  • Lightning will enable instant transaction and microtransactions.
  • On Tuesday, the bitcoin network "locked in" a decision to implement "segregated witness", or SegWit.

The bitcoin community is eagerly waiting for the next big development called the Lightning Network, a technology that enables instant transactions.

This after it reached a new milestone on Tuesday, with the digital currency network "locking in" a decision to implement a new piece of technology called SegWit, that improves capacity of the bitcoin network.

"The Lightning Network is a game-changing innovation, which utilizes smart contract technologies to enable instant micropayments using cryptocurrencies such as bitcoin," Aurélien Menant, founder and CEO of digital currency exchange Gatecoin, told CNBC via email.

On Tuesday, the bitcoin network passed a threshold of support required to lock in a new piece of software, called 'segregated witness' or SegWit. This is intended to improve the capacity of the bitcoin network and allow for more transactions to take place. It also paves the way for Lightning Network products to be introduced later this year.

"Bitcoin's SegWit means the many well-financed companies researching Lightning solutions can start to test on the main network," Fran Strajnar, co-founder & CEO of data and research company Brave New Coin told CNBC via email.

Chris Ratcliffe | Bloomberg | Getty Images

Companies and developers have been anticipating Lightning for over two years, according to Strajnar. He expects products for the network to reach the market very soon.

Bitcoin hit a record high of more than $3,500 on Tuesday morning, before dropping down 3.8 percent to around $3,390, according to Coindesk. The price jumped to $3,480 on the back of the announcement that a decision to implement SegWit to the blockchain, the technology that underpins bitcoin, was locked-in.

Bitcoin's price has since dipped and is currently trading around $3,360. The digital currency is up 247 percent year-to-date.

What will Lightning do?

Currently, bitcoin transactions are validated through a process called mining, where powerful computers solve a complex math problem before the transaction is recorded on the blockchain. A whole confirmed transaction can take up to an hour.

The Lightning Network promises to reduce this process to seconds. It requires participants to agree to a transaction on a separate channel and then the blockchain will update their accounts accordingly. This can be done without the need for miners or third parties such as digital wallet providers.

The developers of Lightning say this means transactions can be instant, will allow for micropayments of bitcoin and enable a larger volume of transactions. It may even help bitcoin be used more on the high street.

"Lightning can be used at retail point-of-sale terminals, with user device-to-device transactions, or anywhere instant payments are needed," the developers said in a summary document.

Lightning will make bitcoin a long-term competitive payment platform and could revolutionize peer-to-peer payments, according to Gatecoin's Menant.

"Particularly with regards to micropayment transactions that may be useful for emerging markets with low-value local currencies," he said.

"It can also be implemented to facilitate machine to machine payments, using its smart contract framework, so that firms running various automated processes can benefit from direct payment relationships between its software and that of its clients or suppliers."

What is SegWit?

SegWit is the result of a long-term "scaling debate" within the bitcoin community about how to reduce the backlog of transactions and add more capabilities to the digital currency. The majority of the community backed SegWit, which moves some data outside of the network to increase its capacity.

However, a section of the community was unhappy with this solution and forced a "hard fork" to the blockchain, splitting it in two and creating a new currency called "bitcoin cash", which is currently worth just $338, according to data from Coin Market Cap.

The Lightning Network is unlikely to cause another blockchain fork in the future, according to Brave New Coin's Strajnar.

"As we now have bitcoin cash, there is a much lower risk of future forks, as future arguments will default to 'just use bitcoin cash'," he says.

Now that SegWit is locked into the network, bitcoin miners, a term used for those who produce new bitcoins and validate transactions, and service providers have a two-week grace period to upgrade their software before SegWit is activated.

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