The Lightning Network: Resolving Bitcoin’s Scaling Issues

The Lightning Network is a payment protocol that operates on top of blockchain-based digital currencies; it is designed to increase the speed of transactions between participating nodes and has been touted as the solution to Bitcoin’s scalability problem.
Lightning Network

The Lightning Network is a payment protocol that operates on blockchain digital currencies. Shutterstock Images

Blockchain technology and digital currencies are gaining public awareness and increasing in popularity, but there is a risk of demand outstripping the pace of their growth. Several opinions have been given to help the likes of Bitcoin and ethereum to scale up- the Lightning Network[1] is among them.

Since its inception, bitcoin has had serious scalability problems[2] regarding the limits of transactions that can be processed on its network.

The blocks (records) on the bitcoin blockchain have a size and frequency limit and can only handle 7 transactions per second.

Although this speed was generally accepted at the beginning, the network has grown tremendously and can no longer process transactions on time. Besides, Bitcoin’s transaction fees are becoming extortionate.

While Visa processes an average of 24,000 transactions per second (which peaks at 50,000), Bitcoin’s network processes a miniature 7 transactions per second.

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The Bitcoin community has tried to come up with several proposals on how to fix Bitcoin’s scalability problems, but a resounding consensus is yet to be reached.

While this has led to several bitcoin-like networks branching out, the lightning network is a promising solution currently at the trial stages.

What is the Lighting Network?

Invented in 2015 by Thaddeus Dryja and Joseph Poon, the lightning network is largely seen as a solution to bitcoin’s scalability problem. It’s thought to be capable of enabling the bitcoin network to handle the ever-increasing transactions as well as the new users jumping on the bandwagon.

It is a second layer payment protocol operating on top of the bitcoin blockchain. Often abbreviated as LN, Lightning Network enables faster transactions between active nodes. The lightning network features a peer 2 peer payment system through bi-directional payment channels that do not delegate custody funds.

The lightning network has been in continuous development since its inception. Bilateral payment channels are the essential elements of the system. They are basically upgraded multi-sig wallets similar to counting frames.

Long before the advent of emails and smartphones, a telegram message was the simple and quickest means of sending messages. You would visit a post office, fill a form and pay for the message based on the number of words it had.

The message would then be telegrammed to the distant end after which a test man delivers to its destination.

So, there were quite a number of players involved in sending the small message which ends up making the process quite costly. This is the exact situation of the bitcoin network.

Now, the lightning network seeks to act at the speed of a speed dial which makes the receiver’s phone ring as soon as a caller dials their number. In simple terms, the lighting network may be something like this; “we do not have to keep every transaction record on the blockchain, let’s keep some few!

The first implementation f the lightning network was developed by Lightning Labs[3] in March 2018; the other two major implementations were carried out by Blockstream and ACINQ between March and June.

Growing with a promise

Growing with a promise

Tremendous growth and super-fast speeds. Shutterstock Images

The lightning network has witnessed tremendous growth and gained traction owing to its security and super-fast speeds. Over the past year, the lightning network grew significantly, and now has more than 2800 nodes and 20,000 channels[4].

The faster growth in the number of nodes is partially influenced by the release of the Casa Lightning Node, which simplified the process of running nodes. Still, the lightning network continues to grow faster than expected as it crossed the $2 million mark a few weeks ago with a massive 575 BTC. Every node has close to 8 channels, each with an average capacity of $110

Profits for crypto holders, but centralization

The element of centralization is a significant drawback of many payment hubs today. However, centralization could be an advantage (in the case of the Lightning network) as it creates an incentive to run the Lightning nodes. Consider someone who HOLDs Bitcoin for a long time.

Instead of letting it sit in their hardware wallets, they create an intersection on the lightning network which accumulates interest in the long term. What they had to do is create a payment channel and deposit their bitcoins. Once established, the channels accumulate a few Satoshis every time their network is used for network routing. What a fortune!

It is important to note that transaction executers generate the ‘interest’ earned over time in the form of minimal intra-network fee. However small they are, the small charges eventually build up to some good profit over time for the HOLDER.

Not without Criticism

The lightning network has left the bitcoin community split into two. On one side, you have people who support it thinking that it’s the work of a genius and possibly the most significant invention after bitcoin.

On the other hand, some people are feeling the lightning network is a waste of time that would prevent bitcoin from realizing its full potential.

Whatever the side of the fence you stand today, we all can agree on one thing- the importance of decentralization.

Another criticism facing the lightning network is its possible centralization by companies holding large nodes which may create some sort of ‘payment hubs’ as claimed by ‘redditors[5].’ Last year, it was discovered that the ten largest Lightning Network nodes controlled a combined 53% of the overall network capacity.

While an improvement over the next six months reduced the overall size of the ten largest nodes to 38%, reliance on large nodes is indeed evident.

Advantages of the Lightning network

Compared to the primary system, the Lightning network has five clear advantages;

  • Lower cost: You’ve likely noticed that the current Bitcoin transaction fees are unsustainably high. The lightning fees will be quite lower compared to what users currently. Also, the lightning network seeks to reduce congestion on the main network, and reduce its size in the long-term.
  • Greater Anonymity: Since the Lightning network does not record every transaction on the blockchain, it will obviously be a little harder to monitor user’s consumption, or match a wallet addresses.
  • Higher speed: Today, transactions on the Bitcoin network require the approval of the whole system. As for the lightning network, transactions will be instantaneous since there’s no requirement for approval from the entire network.
  • Scalability: The lightning network is certainly not the ultimate solution. There are a few problems it faces. However, by continually improving the user experience, the scalability of the network will significantly improve in the years to come in preparation for the expected surge in the network usage
  • Nano payments: On the main network, making small payments has proved expensive for many users. For example, if you make a transaction of 100 Satoshi, you would probably pay a network fee higher than the transaction itself. On the other hand, the Lightning network allows users t make a similar payment (100 Satoshi) for a cost of 0.000001. This transforms bitcoin into real digital cash that provides for small amounts to be completed on the network.

Some tradeoffs of Lightning network against the main network

  • Keeping money in a hot purse means a slight drop in security
  • For those interested in getting paid on the network, they need to get connected to the network and create a ‘payment request.’ This is unlike the main network where users are required to share their wallet address simply
  • Possible centralization: The need to direct digital payments through the system may potentially create payment hubs[6].
Digital payment hubs

Digital payment hubs in Lightning network. Shutterstock Images

Future possibilities

Under the lightning network, every payment model may become possible in the future. Just think about what an instant payment system with no overheads can do. As in the era of streaming video and audio content, we might be at the brink of a money ‘streaming’ period.

For instance, your Smartphone may be enabled to make small payments to WiFi hotspots and allow you to pay for only the partial video watched. Or even better, think of a world where workers are paid for every second they work, as opposed to getting a bi-monthly check. Who wouldn’t like it?

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If bitcoin is to become a fully-fledged payment option, there is certainly need for technical optimizations to decrease computing resources required for receiving, processing and recording Bitcoin transactions to allow more throughput without adding extra strain to the bitcoin network.

Bitcoin’s block size limit has created a real bottleneck in its network usage, transaction delays, and increased processing fees.

Overall, the bitcoin lightning network remains a complex topic to understand and handle but has a long way to go before completing its testing version to become fully operational.

Whereas there are evident shortcomings, the lightning network is big news in the cryptocurrency world. Their instant and almost feeless payments may propel bitcoin ahead of credit cards or even cash and people-to-people transactions.

Read Next: The Best Person-to-Person Bitcoin Loan Networks (Bitcoin P2P Loans)

This is just the beginning, but stakes are high considering the network’s implementation processes are being led by renowned developers who are entirely devoted to changing the way digital payments happen. Hopefully, the Lightning network will go global sooner conveniently and efficiently.

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The writer’s views are expressed as a personal opinion and are for information purposes only. It is not intended to be investment advice. Seek a duly licensed professional for investment advice.

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