Initially designed as an electronic peer-to-peer payment solution, Bitcoin represents a great tool for those who want to exchange value without having to rely on centralized institutions. Although it offers its users a number of advantages, it also has a very serious drawback: scalability.
This problem has been acknowledged by the community of cryptocurrency enthusiasts since Bitcoin’s early days. A few solutions have been invented so far with the Lightning Network being one of them. Our team at Numbrs has explored Lightning Networks technology in great detail. In this article, we are going to review this second-layer scaling method, its pros, cons, and whether it really has the potential to bring Bitcoin to the next level of mass adoption.
Scaling: the problem of more
Before we get closer to reviewing this technology in detail, it’s important to explain why Bitcoin scalability matters at all.
Bitcoin’s network has a very low throughput capacity as it can only process 7 transactions per second at the maximum. If the number of users willing to send funds exceeds this threshold at a given moment, they have to participate in a contest to find out whose transaction will be confirmed by the network first. Those who offer higher network fees win.
With that said, it’s not difficult to imagine what happens when the number of users spikes as it was during the bullrun in 2017. At their highest peak, the network fees exceeded 55 USD per transaction.
What is the Lightning Network?
Proposed by Thaddeus Dryja and Joseph Poon in 2015, the Lightning Network represents the second layer for the Bitcoin network aiming to resolve the scalability problem. Its key goal is to provide a solution for microtransactions in BTC that would be confirmed with a speed of lightning at a low cost regardless of how the network is overloaded.
To make use of the Lightning Network, participants open an off-chain channel, deposit some bitcoins there, and make transactions while paying negligible fees until they deem the channel relevant. Once they decide to finish their operations, they close this channel and send the final balance to the main network for confirmation in a single transaction.
How the Lightning Network works in real life
Let’s review how this approach works in practice. Imagine Alice running a coffee shop and Bob willing to buy a cup of coffee from her for bitcoins every day. As the network fees are really high, they decide to open a direct channel between each other on the Lightning Network.
- Once the channel is open, a unique BTC address is created that refers to this channel.
- Bob deposits some bitcoins to this address to guarantee that the transactions will be paid.
- When the deposit transaction is recorded on the main blockchain, the channel gets open officially.
- Bob buys coffee from Alice with all transactions being recorded within this channel enjoying fast payments and negligible fees.
- When the deposit ends or when the parties decide to finish their collaboration, they close the channel. All these small payments are summarized and released to the main chain in a single transaction.
Thus, the parties get instant transactions at near-to-zero fees and only have to pay the network fee when they close their channel.
How widely is the Lightning Network implemented?
Despite its obvious advantages, the Lightning Network is still far from being widely adopted across the network. The website 1ml.com displays that at the time of writing, only 1.9% of all nodes support the second layer. The number of channels constantly grows, but so does the Bitcoin network itself.
1ml.com: the number of nodes with the Lightning Network grows too slowly to cover the whole network
The obvious reason for such low adoption is the complexity of the setup process. Launching a node together with the second layer on top of it is a pretty complex task that can hardly be worth the invested efforts.
To bypass this obstacle, the parties can rely on the channels opened by other participants. For example, if both Alice and Bob have an open channel with one more person, they could exchange value through this third party without opening a new channel between each other.
Those who consider routing to be still too complicated may use the wallets that come with the built-in support for the Lightning network. We at Numbrs plan to add this feature in the nearest future so as to make micro-transactions fast and affordable for all our users.
LN’s upsides and downsides
With all the features described above, the Lightning network provides cryptocurrency enthusiasts with the following advantages:
- Low fees. While exchanging funds on the Lightning Network, users pay truly negligible fees. They only have to pay a full network fee when they close the channel.
- Fast transactions. The Lightning Network allows its participant to verify transactions instantaneously regardless of how the main chain is overloaded at the given moment.
- Designed to scale. The LN website claims that the technology is capable of millions to billions of transactions per second. Such limits would be enough to serve the ever-growing number of users without putting down the whole network.
- Cross-chain transactions. The technology allows converting different cryptocurrencies directly between each other as long as the chains support the same cryptographic hash function.
As you may have already guessed, the downsides are also present. The following issues may turn into serious obstacles:
- Deposit limits. The parties can exchange funds over the Lightning Network only within the deposited sum. If you send funds through a route made up of other channels, you are limited by the smallest deposit in the chain.
- Limited coverage. The number of nodes that have deployed LN is still too small.
- Complicated routing. With the growth of the network, it becomes more difficult to build a route between the nodes.
- Offline transaction risks. LN’s whitepaper states that there is a technical capability for one of the parties to conduct a Fraudulent Channel Close and steal the deposit while the other party is away. The closure can be contested, but only within a limited period of time.
The future of Lightning Networks
Despite all the downsides mentioned above, we at Numbrs believe that Lightning Network is a great invention that is worth studying and implementing. Why so? The answer is simple: Bitcoin is here to stay. With every new bullrun, more and more people become aware of this new payment method. The popularity of the cryptocurrency grows while the scalability problem persists and only tends to get worse in time. And although many other blockchain-based projects have been created to resolve the problem of scalability, none of them has gained even the smallest fraction of Bitcoin’s recognition.
We believe that bitcoin is truly owned by the people, as there is no dedicated team behind Bitcoin making decisions about its enhancements and refinements. For this reason, end-users have until now had to deal with imperfect solutions invented by enthusiasts. So far, the Lightning Network is the only viable tool that can take Bitcoin to the next level of mass adoption.