Is the Lightning Network Geared For Faster, Stronger and Cheaper Transactions?
What does it take to make a good digital payment system? Like elite athletes and your Friday night takeaway order, the answer is speed.
When you pay for a coffee in the morning or order a book online at night, you want the transaction to be as close to instant as possible.
The scaling debate
Back in 2009, early cryptocurrency adopters dreamed of being able to use Bitcoin to pay for their day-to-day shopping. But a major issue soon emerged: scalability.
The Bitcoin network can currently process on average 7 transactions per second, compared to the Visa network’s alleged 24,000–50,000. If Bitcoin wants to compete as a major payment system, it needs to scale.
Seven transactions per second is simply far too slow for anything more than a handful of enthusiasts.
This comes down to technical limitations; blocks can only store so many transactions, which leads to a backlog of payments awaiting confirmation during busier times. Like back in the 2017 rush when some people had to wait for days — cue horror movie soundtrack and PTSD-induced flashback. Increasing the block size (currently 1MB) would make it too expensive for miners to run the network.
Scalability is crucial for any new technology, especially one aimed at mass adoption. It’s no use having an amazing system if it can’t handle more than a few users. Bitcoin Cash, a fork of the original Bitcoin, updated the block size to 8MB to allow for faster transactions. But it’s more expensive to run and has failed to gain much support.
What is the Lightning Network?
The idea behind the Lightning Network is that not all Bitcoin transactions need to happen via the blockchain, which confirms and records them. This process is time-consuming and can be costly if the network is congested. It’s also not really necessary — not every transaction needs recording on a permanent, public ledger.
The Lightning Network exists as an additional layer on top of the blockchain. It doesn’t function separately to the blockchain.
It lets cryptocurrency users create payment ‘channels’ between themselves.
They can then use those channels to make transactions as often as they like and for as long as they need to. The channels are bi-directional, meaning payments go both ways. Seeing as the channel just exists between those users and any payments in the channel are not confirmed and recorded on the blockchain, transactions are cheap (or free) and very fast. And we’re wary of calling it too early, but this could very well be the future of crypto payments.
When the users decide it’s time to close the channel, the details are finally added to the blockchain, but in one transaction, which nets the balance owed to the respective parties. This means that, regardless of how many transactions are made through the channel, only two will be recorded on the blockchain — the initial balance and the final balance. It’s important to note here that if a partner is offline when a channel is closed, the Bitcoin will be unspendable for 1,000 blocks, which to quantify in time, is roughly a week. This has been viewed as a big downside to the Lightning Network.
Like the blockchain, the Lightning Network is decentralised. It is the brainchild of two developers, Thaddeus Dryja and Joseph Poon.
The white paper described it as:
“a decentralised system for instant, high-volume micropayments that removes the risk of delegating custody of funds to trusted third parties.”
If you want to make a payment to someone using the Lightning Network but don’t have a channel set up with them, you can still take advantage of its speed and low cost. The network will find a route via the channels you are connected to, searching for the shortest path to the recipient. For example, let’s say you want to pay with Bitcoin in a coffee shop, but you don’t have a channel open with them. But you do have a channel open with a friend, who has one for the coffee shop, meaning the Lightning Network can use those.
It easily supports even the smallest transactions, known as micropayments. These are used for things like paying online content creators by sending a small amount of Bitcoin to the author of an article you enjoyed.
Growing pains
As they say, the future is already here, it’s just unevenly distributed. The first test transactions happened in December 2017 and usage has slowly increased since early 2018. As of May 2019, over 8,238 mining nodes run the Lightning Network, leading to the creation of over 38,630 payment channels with a network capacity of around 1,000 Bitcoin.
Whilst there are many benefits that the Lightning Network brings, it’s still an imperfect solution and has a few limitations.
For now, it seems the best of the Lightning Network is for smaller transactions.
A bigger concern is that the Lightning Network could become more centralised. This is similar to what’s happening to Bitcoin mining nodes. In the past, anyone could mine cryptocurrency with just a normal laptop. But as the cost of mining has increased, much of the power is concentrating on a small number of large, commercial operations. Some members of the cryptocurrency community are concerned that corporate players could swoop in and commandeer the Lightning Network.
Why?
Because they’d create large payment channels, and routing would become dependent on these players, as big payments require big channels. Lightning labs are working on a proposal for something called AMP, which splits lightning transactions into little pieces, which should address centralisation concerns. However, this is only in planning stages, but when it arrives, it should make a big impact.
The Lightning Network is still new and needs further refining. But this is an exciting development with the potential to rekindle the dream of cryptocurrency mass adoption. To date, one of the most common reasons given for why Bitcoin can’t achieve mass adoption is the scaling problem. If the Lightning Network takes off, it will be possible for any two parties anywhere in the world to send each other money instantly and for free.
