Bitcoin Lightning Network spells trouble
Bitcoin processes about 2500 transactions in each block in the chain. It takes about ten minutes to add a block to the chain. This is not very useful on a large scale so another layer was designed to lay on top of the Bitcoin blockchain: Lightning Network.
It took a while to wrap my head around the concept and now I know enough to explain the concept and see where it will fail. It will not solve the scaling of Bitcoin and actually will put extra constraints on the blockchain. Here’s how.
To connect to the lightning network and be able to make a quick transaction you need to open a payment channel. So you will create another wallet with a private key together with your counterpart, the other end of the channel. You will put some bitcoins -or part of a bitcoin- into that smart contract to prevent a double spend. To free up your bitcoins you need to close this smart contract. This contract has a balance between you and your counterpart. So if you put a bitcoin in your shared wallet your counterpart does this as well. In the end when the contract closes you both get the part based on the balance that is stored in the Lightning Network layer.
Say that you are A and you have a payment channel with B, you can put as many transactions on the balance you like as long as they don’t exceed the funds that you committed when starting this contract. So far so good. If it’s your local Starbucks and you come there often it may make some sense.
If C wants to join the fun too, C can open up a payment channel with B as well. B and C have to store some bitcoin in their shared wallet with a smart contract. Now if C wants a quick transaction with you -A- this is possible. C makes a transaction with a destination of A. First this transaction amount is settled between C and B and then between B and A. This, of course, is still a small example but the chain of settlements between A and any other node in the Lightning network can easily have ten hops. Any relay point -in our case B- needs to have more channels than one to be used as an intermediary. After a channel closes the final transaction is stored on the Bitcoin blockchain.
What is the most important metric in LN? See this picture. Can you spot it?
It’s Average Channel Age.
So here’s what I think will happen. Basically it’s the same problem as Bitcoin had itself. A so-called “champagne” problem, or in other words, a problem you -usually- want to run into Success. Bitcoin was so successful that the scaling issues arose. The same is likely to happen with Lightning Network.
To use LN you need a “merchant” service, a hub that is well connected so you can use your LN in multiple places. Merchants are likely serviced by a company that may have good funds to keep a channel open for a long time.
But for users that want LN to pay for the coffee, this will be different. When a user opens an LN channel it has to allocate a budget for this channel. “How much am I going to spend?”. A good question since when you allocate bitcoin to this channel, it cannot be used for anything else. I don’t know how much cash you have in your physical wallet. But usually, it’s not more than 100 euros.
So users will likely have shorter average channel ages and this means 2 bitcoin transactions that are on top of the “normal” activity outside Bitcoin. Say that a million users have an average channel age of 30 days. That means 2 million transactions in a 30-day lifespan divided by a capacity of 2500 transactions per ten minutes is a whopping five and a half days per month of opening and closing channels. So a million users may lead to 18% of the whole Bitcoin transaction capacity. In this scenario, 5 million users of LN would clog the whole system and a way to large mempool. Nodes will favor the non LN transactions and it will unpopularize the whole Lightning Network, no?
So the average channel age is a crucial metric of the viability of the Lightning Network. It will not be much of a problem now, but it will be a major problem if LN is adopted around the globe.
So, what are your thoughts? Do I miss something? Is my theory incorrect?
English is not my native language and I will correct bad grammar, thanks for your patience!
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