Researchers are putting new effort into developing bitcoin's Lightning Network.

With the Segwit2x hard fork – which looked to increase the bitcoin block size parameter to 2MB – suspended, ETH Zurich researchers Conrad Burchert and Roger Wattenhofer and Blockstream engineer Christian Decker have proposed a more scalable version of the payments channel scheme, believed by developers to be the best way to expand bitcoin to accommodate more users.

Sometimes called bitcoin's "layer two," Lightning hasn't yet been pushed live onto the bitcoin blockchain, but proponents of the idea see it as a way to boost bitcoin's transaction capacity without increasing the block size (as bitcoin cash, which forked off bitcoin in August did).

In a new paper called "Scalable Funding of Bitcoin Micropayment Channel Networks," however, the three developers now envision even another layer, one that would be sandwiched between the bitcoin blockchain and Lightning, which they think would overcome Lightning's existing limits.

Perhaps most notably, the researchers argue that limit is somewhat defined by the bitcoin blockchain itself, which, capped at 1MB, can't support infinite Lightning channels. After all, users must complete bitcoin transactions and record them on the blockchain each time channels are opened and closed.

In this way, Decker, pointing to existing research, suggests there's an upward bound on just how many Lightning Network transactions are feasible today.

He writes:

And while this isn't a problem right now, it could lead to issues in the future – scaling issues that continue to be a hot, and contentious topic in the crypto community.

To understand what the new layer would provide, it's helpful to compare the proposed layer to the way Lightning functions currently.

Today, a user must open a new Lightning "channel" with another user through a regular blockchain transaction. Once that's established, the two users can make as many off-blockchain transactions as they want or are able to with the initial amount of value they put into the channel.

The new proposal, which Decker called "Lightning extended," utilizes so-called "hook transactions" to move funds into a multi-party channel capable of supporting more than just two users. The paper calls this a "channel factory."

The method allows two people in a multi-party channel of say four or six, or as many as 15, to start a separate isolated channel within the main channel.

While it sounds a bit complex, the mechanism allows the two users in the isolated channel to close that channel and be dropped back into the multi-party channel, where they could then open another isolated channel with someone else. And all this is done without going back to the blockchain and incurring the transaction fees associated.

In this way, users could hypothetically open and close channels several times without ever making an on-chain transaction.

"The only thing the blockchain needs to know in the end is where the money ends up. So, if we have many intermediate states, we don't have to publish them ever. Instead, we just make a transaction that everyone signs. This is the only thing that goes to the blockchain," Buchert, the lead author of the paper, explained.

He continued, "It offers more flexibility, basically."

According to the authors, the channel factories will lead to reductions in cost, comparable to the number of people in the multi-party channel. For instance, a 100-person group would lead to a 90 percent reduction in costs, compared to 100 traditional payment channels, the paper explains.

While the benefits seem attractive, the authors say there's still a way to go before the project could see real-world use.

For one, the developers said, the technology would perform better with if another long-proposed technology, Schnorr signatures, was added to bitcoin.

Whereas channel factories are currently limited to groups of 15 people, with Schnorr signatures, users could open up groups of an unlimited size – scaling Lightning even further.

Although there could be downsides to larger groups, in that one user could spoil the channel for everyone else by sending a transaction from the inside to the bitcoin blockchain. According to Burchert, developers and users will have to experiment to see how many members per group works in a real-world setting most effectively.

Plus, with Lightning still in the testing phase, Burchert said that channel factories can't jump to the front of the line.

He told CoinDesk:

And when that time comes, Decker said it can be integrated more easily because Lightning sits on top of the bitcoin protocol, and so shouldn't give rise to much conflict when upgrading.

"While we don't plan to implement this right away, this could be a potential upgrade later on, without any disruption to the network," Decker concluded.

Disclosure: CoinDesk is a subsidiary of Digital Currency Group, which has an ownership stake in Blockstream.

Lightning strike image via Shutterstock