Micropayments in Lightning Network
Since the dawn of the internet and the rise of smartphones, technology has advanced to the point where we can send and receive information across the globe within seconds. The way we pay for things has evolved too. We can now send money around the world with the click of a button.
Indeed, according to research released by Capgemini from the World Payments Report 2017, global digital payment volumes are projected to rise by an average of 10.9 percent through to 2020, reaching around 726 billion transactions.
When a digital payment is processed via a single centralized ledger, such as bank to bank in a person’s home country, the transaction is generally fast and cheap. However, when it involves more than one ledger, across different countries, currencies, and banking platforms, the process can be slow and inefficient. This is particularly the case for cross-border remittance payments, which, according to the World Bank, grew by 7 percent to $613 billion in 2017. It also showed that the global average cost of sending $200 was 7.13 percent in Q1 2018. In South Africa, it costs as much as 16.18 percent to send $200.
Whether it is remittance payments, sending cross-border transactions, or processing micropayments, transferring money shouldn’t have to be an expensive undertaking.
This is where cryptocurrencies and the Lightning Network come in.
How The Lightning Network Works
To achieve fast and cheap micropayments, smart contracts are used. Via a network of multi-signature transactions, any participant on the Lightning Network can pay someone else. This is done through a two-party consensus, known as a payment channel.
Even though two parties are involved, a person doesn’t need to open new payment channels with every new party they want to transact with. For instance, Alice may not have an open channel with Charlie, but Alice is indirectly connected with Charlie through Bob. With the Lightning Network, anyone can transact with someone else who is connected to their network of payment channels. In theory, everyone should be connected with others on the network through a small number of nodes. To boost the number of people using the network, Lightning is incentivizing LN adopters to run connecting nodes by enabling them to collect small fees each time a transaction is conducted through their connections.
To begin the process of transacting with each other, the two parties involved initially send the bitcoin into a multi-signature channel, which has a unique bitcoin address. This address is placed on the Bitcoin Blockchain and shows how much bitcoin belongs to each person involved.
Prior to sending transactions with each party member, one on-chain transaction is done on the blockchain to deposit the funds in the wallet. Lightning states that “before this transaction is made, a refund transaction is created, which returns the original deposit to both parties.” After the transaction is broadcast on-chain, the payment channel is open and ready for transfers. The two parties involved can now send an unlimited number of transactions to each other.
With every transaction conducted, both parties must agree on the new balance to maintain a clear record as to who owns what bitcoin stored in the multisignature wallet. When one wants to update the balance with a new balance, both parties must consent to the new balance.
Rather than conducting their business via the public blockchain, the Lightning Network’s use of payment channels enables users to handle their business directly with each other. This means users can avoid expensive and time-consuming interactions with the blockchain, particularly if it involves micropayments. It’s only when both parties want to terminate the channel or if there is a dispute that they fall back to the most recent balance sheet provided by both parties, which will determine how the funds in the multisignature wallet are split up. This is then conducted on-chain to provide a record of the transaction.
The Lightning Network is a significant boost to the bitcoin ecosystem. With key advantages like efficient micropayments, instant settlements, low fees, and horizontal scalability, the Lightning Network is an essential improvement to our global digital payments systems.
Turning to Crypto for Remittance Payments
Cryptocurrencies have proven to be a popular, cheap and quick alternative when it comes to sending money abroad. With a more than $600 billion remittance market, it makes sense that cryptocurrencies like bitcoin are used to send money to friends and families overseas rather than through bank transfers. According to one estimate, sending $200 via bitcoin costs $6 instead of the typical $12 that comes with sending money through a bank.
While bitcoin provides a cheaper alternative to payments made through banks, there are several technological risks and limitations that come with it. First, bitcoin can only process seven transactions per second, limiting its ability to process remittance payments quickly. There are also transaction fees associated with sending payments, leading to price volatility and preventing people from sending micropayments.
Turning to the Lightning Network for Global Micropayments
To solve these issues, the Lightning Network (LN) is a promising solution. As a decentralized system for an instant, high-volume micropayments, the LN removes the risk of delegating custody of funds to trusted third parties. In addition, the second-layer payment protocol, initially built on top of the Bitcoin Blockchain, reduces transaction fees by creating off-chain payment channels directly between two parties.
At present, bitcoin combines transactions into blocks that are spaced roughly 10 minutes apart. After about one hour, six blocks are confirmed, which is when payments on the Bitcoin Blockchain are regarded as secure. In order to scale the network, that one hour waiting time is too long.
With the Lightning Network, payments are instant and do not require block confirmations. Also, the possibility of micropayments opens up new markets. Lightning can send payments as low as 0.00000001 Bitcoin without custodial risk. This means that funds as low as $5 to $10 can be transacted instantly each day, meaning smaller amounts can be sent more often.
At the moment, the Bitcoin Blockchain requires a minimum output size that is hundreds of times higher, and a fixed per-transaction fee that makes micropayments impractical. However, the Lightning Network network allows minimal payments denominated in bitcoin through the use of bitcoin transactions.
Make Your First Microtransaction on Lightning Network
The easiest way to make your first microtransaction on the Lightning Network is to install a bitcoin Lightning Wallet. We launched our own Peach Wallet — a free cross-platform desktop Lightning Network wallet for bitcoin. It simplifies the process of making micropayments, which are processed seamlessly via our user-friendly application and built-in payment server solution.
Here’s how to send your first microtransaction:
- Install Peach desktop or mobile Wallet from our website.
- Select “extended mode”.
- Connect to our reliable Peach Public Node by using QR-code.
- Start microtransacting!
About Lightning Peach:
Lightning Peach is Bitfury’s team of engineers dedicated to advancing the Lightning Network.