Is Lightning Network Up to Task?

4Rev

Bitcoin and blockchain technology are seen by many as having the potential to revolutionize the world’s financial system as we know it. However, the rapidly growing interest and demand for the cryptocurrency has brought to light one of Bitcoin’s major shortfalls, scalability.

VisaNet, the network which processes Visa credit card payments, currently processes over 1,600 transactions per second, with the potential to scale up to 56,000 transactions per second if needed. By comparison, Bitcoin’s network can currently process a maximum of only 7 transactions per second.

As the Bitcoin trading volume increases so too does the number of transactions on the blockchain. This results in a rising number of unconfirmed transactions, each competing for verification from miners. As a consequence, transaction fees have seen a sharp increase in an effort to incentivize miners and avoid failed payments. Transaction fees as high as US $30 have been observed in recent months.

These scalability issues have put Bitcoin in a light that is a far cry from the original vision of its creator, who intended it to be a fast and inexpensive way of transferring funds without using the centralized payment systems of today.

What is the Bitcoin Lightning Network?

Lightning Network is the Bitcoin developer community’s answer to address the cryptocurrency’s stability issues. Launched as a public beta on March 15, 2018, with major contributions from a California startup company, Lightning Labs, the Lightning Network is a “second layer” payment protocol operating on top of the current main blockchain. Simply put, instead of scaling the main blockchain, the network would facilitate instantaneous payments and significantly reduced fees by keeping these transactions separate from the main blockchain. The intention of the Lightning Network is to help Bitcoin to be more feasible as a day to day currency by ensuring that small, everyday transactions do not cause congestion of the main network. Because of its underlying premise, the Lightning Network is also known as the off-chain approach.

How Does the Lightning Network Work?

The first essential element of the Lightning Network is the payment channel. A Payment channel is an off-chain network that operates parallel to the main blockchain and allows the connected parties to seamlessly conduct multiple transactions with broadcasting them to the network.

A payment channel is first created between two parties who wish to transact with each other by setting up a multi-signature address. This address, which requires signatures from both parties, holds a certain amount of Bitcoin (provided by at least one of the parties involved).

Once the payment channel is complete, its creation is broadcast to the blockchain, and both parties are free to send funds back and forth without ever interacting with the main blockchain again. When transactions are conducted, both parties digitally sign a balance sheet which records the amount of Bitcoin in the wallet and the amount that belongs to each person. This balance sheet is kept by both parties in the multi-signature address.

Once both parties are done transacting, the payment channel can be closed at any time and broadcast to the network to be validated. Upon validation, the funds are released to both parties in accordance with the information on the latest balance sheet.

The “network” in Lightning Network is so named because users can conduct transactions via the payment channels of other connected users. This means payments can be done through “indirect” channels rather than having to set up a payment channel for each new transaction. The network will automatically find the shortest route through intermediary payment channels that connect the sender to the receiver. These intermediaries act as connecting nodes and are incentivized through small fees that are paid out for each transaction that passes through their channel.

The entire network is based on smart contracts, therefore, the system remains trustless while ensuring that funds either reach their intended destinations or returned to the sender in the event of rerouting failure.

Benefits of the Lightning Network

Since the Lightning Network is independent of the main blockchain, the transaction fees are significantly reduced. Fees can potentially range in the order of fractions of a cent as compared to fractions of a dollar by traditional methods.

In addition, the other main advantage of the Lightning Network is the ability to settle payments instantaneously. Because the main blockchain is not involved, the time it takes for funds to travel back and forth between destinations is reduced to fractions of a second as opposed to fractions of an hour.

Potential Shortfalls of the Lightning Network

Although benefits of this technology seem to address the main shortcomings of Bitcoin, there have been a couple of concerns that have been expressed members of the community. Firstly, since the network works via P2P channels, unresponsive peers can slow down transactions as users may have wait to close the unresponsive payment channel to find an alternative route.

Also, there is a concern that this solution may not be ideal for large Bitcoin payments. The Lightning Network depends on intermediaries having enough transferable funds in their multi-signature wallets. It is possible that even though a payment route exists, there may not be sufficient funds in the multi-signature wallets to carry out the transaction.

Finally, the greatest concern expressed by the community is the fact that the Lightning Network may encourage centralization. Large corporations, such as banks, may be encouraged to set up payment channels and act as payment hubs to carry out large-scale payments, therefore rendering other “smaller” intermediaries obsolete.

The Lightning Network plans to restore Bitcoin to its original intended functionality of being a fast, efficient and inexpensive medium for sending and receiving payments. Should it be successfully implemented, this solution can prove to be the game-changer in the world of cryptocurrency. There are some legitimate concerns with this technology, particularly with the issue of centralization. However, the network is still in beta and its impacts can only be fully realized once it is brought mainstream and fully adopted by Bitcoin holders.

Krystal Nanan is based in Port of Spain, Trinidad and Tobago

4Rev is a global cryptocurrency website aimed at providing unbiased research and analysis on Blockchain, BitCoin and other Altcoins.