The value of Bitcoin has been soaring to unprecedented heights, and the subsequent news coverage it has been receiving has caused the cryptocurrency to become more popular than ever. Despite recent success, however, Bitcoin’s ability to execute its originally intended function as a form of digital cash has never been worse.
High fees and slow transaction times have made using the network to make everyday purchases a foolish endeavor. What’s more is that the BTC community has not been able to rally together around an update to the Bitcoin protocol that would improve the situation.
However, there is hope yet: blockchain startups ACINQ, Blockstream, and Lightning Labs have come together to develop the Lightning Network, a settlement layer that would work in conjunction with the Bitcoin network to settle transactions of any size in real time.
Proving its capabilities when it comes to making small, everyday transactions, the Lightning Network was recently successfully used to buy a cup of coffee and a Yallz.org article. The transactions were verified on LN nodes that were spread across the globe, proving the network’s interoperability.
Charlie Lee, the founder of Litecoin, made a poetic quip about the nature of the relationship between the Lightning Network and Bitcoin. While the comparison is an imperfect metaphor, it does explain the representational nature of the LN to BTC:
Fiat is to gold as lightning network is to Bitcoin.
Fiat was effectively a layer 2 solution to scaling gold. It was backed and settled to gold until that backing was removed. Unlike fiat though, LN’s settlement to Bitcoin is cryptographically secured and cannot be removed!
— Charlie Lee [LTC] (@SatoshiLite) December 10, 2017
Despite the recent round of successful tests, the Lightning Network is still far from practical implementation. Should Bitcoin users believe the hype?
Why Does BTC Need a Solution Like the Lightning Network?
The Bitcoin network has long had a serious issue with scalability. Because of its limited block size, the Bitcoin network is only capable of confirming an average of 3-4 transactions per second (for perspective, the Visa network is capable of confirming up to 24,000 transactions per second). At moments of high traffic, this can cause hours-long wait times and extremely high transaction fees.
As the Bitcoin network becomes more popular, the problem grows more serious. Imagine that you’re going on a trip that requires you to fly over the ocean. The only way to get to the airport is via bus; the bus can take a maximum of ten people every ten minutes. If there are only nine people, none of them will have to wait. However, if there are twenty people, they will need to get in line. If there are a hundred people – you get the picture.
In order for a transaction to be confirmed on the Bitcoin blockchain in the traditional way, nodes (computers that uphold a blockchain-based network) must work to validate it through a process called ‘mining’. Mining is essentially the process of solving difficult equations that provide a mathematical proof that a transaction actually happened. In exchange for their work, nodes are rewarded in the form of BTC tokens.
#FBS2020: FBS Gives Away Lucky Gift Boxes in A New Year PromoGo to article >>
Once the proof has been established, the transaction is stored in the Bitcoin blockchain for all to see (involved parties’ identities are pseudonymized.)
According to Investopedia, the Lightning Network takes transaction validation off of the blockchain, combining these ‘off-chain’ transactions into groups that can then be added to the Bitcoin blockchain as a single ‘on-chain’ settlement. Practically, this has the effect of processing transactions instantaneously and with extremely low fees.
The Lightning Network needs to have nodes of its own to function properly. However, the network has been designed such that even a low-powered computer can become a Lightning Network node.
If implemented successfully, the Lightning Network will be capable of solving the Bitcoin network’s scalability problem. In fact, the Lightning Network could make transactions on the Bitcoin Network so efficient that BTC could be used as a platform for micropayments.
Andreas Antonopoulis, serial entrepreneur and author of “Mastering Bitcoin”, said of the Lightning Network: “Because you are not required to fill a capacity that is very limited, like a 1MB block, the fees (for transfer and payments) will be very low, close to the marginal cost of delivering that service.”
Charlie Lee Goes Long on Lightning
The Litecoin founder, an outspoken and jovial figure in the crypto space, has come out in strong support of the Lightning Network despite the fact that some argue that a more scalable Bitcoin could mean the death of his own coin.
Lee sees things another way. “Even with LN, Bitcoin still cannot service every person in the world,” he wrote in a blog post on segwit.org. Additionally, he wrote that “LN nodes will charge a fee for LN txns going through them and that fee will be relative to the Bitcoin network fee. So Bitcoin LN txns will be more expensive than Litecoin LN txns.”
Lee goes on to imagine a future in which the Lightning Network could act as a sort of bridge between the BTC and LTC networks that could ultimately make transactions less expensive for everyone. “It may make economic sense for a LN txn to go via Litecoin and back to Bitcoin to get the cheapest rate. Lightning makes this possible because it allows the two LN to be interoperable.”
He continues, acknowledging that there is no way to determine whether such a connection would be practically possible until after LN have been implemented on both the BTC and LTC networks.
Time, Time, Time
As promising as the LN is for reclaiming the Bitcoin network’s functionality as a system of digital cash, the project is being worked on by such a small pool of developers that we may not see the fully-functional version of LN for some time to come.
Investopedia also notes that there are a few “issues relating to the network’s security that need to be ironed out.” The Network will also need to find a way to incentivize users to become LN nodes.
Despite the need to tie up these loose ends, however, the LN is one of the most promising solutions to BTC’s issues that has come along yet. While the future is unknown, it certainly appears to be bright.