Bitcoin maximalists claim we don’t need any other cryptocurrency but the one Satoshi Nakamoto created. But critics argue that Bitcoin can’t be widely used as a currency because the transactions are way too slow. Well, Bitcoin fans have an answer for that. Promising ‘layer 2’ Bitcoin technology called the Lightning Network shows extremely good performance. Here is what you need to know about the Lightning Network.
Bitcoin is great.
It’s the first and still the biggest crypto network by market capitalization. And it also has the highest day circulating volume, unless you take into account Tether stablecoin.
The biggest financial institutions primarily look at Bitcoin efficiency. And wealthy people are buying this token as it is considered the most stable in the volatile crypto world.
Well, for general audience the whole crypto is about Bitcoin. Stablecoins are getting recognition too, but altcoins are still nothing more than toys for crypto geeks and greedy financial traders.
Despite all that Bitcoin still fails to become a currency for everyday payments. Usually Bitcoin transaction take 5-10 minutes, but it often happens so that users have to wait hours for their transactions to be completed.
Critics say speed is crucial for wide usage of any digital currency. That’s why some altcoins are actually built on the idea of speed. Solana, Cardano and others boast their high speed which is sometimes faster that traditional financial networks like Visa and Mastercard.
Well, there is a hope for Bitcoin. It is a technology called the Lightning Network.
Basically, Lightning Network is an addition to Bitcoin blockchain network. It allows transactions to be carried with the speed quite comparable to Visa or Cardano.
So is Bitcoin saved now? Or are there any hidden downsides of the Lightning Network that eliminate hope for Bitcoin?
What is the Lightning Network?
Let’s clarify the basic points. Bitcoin Lightning Network isn’t a token, nor even a different blockchain.
There is a Lightning Bitcoin token (LBTC) on the market listing. That could be misleading because the token has nothing to do with the Lightning Network concept.
The сrypto community prefers explaining Lightning as a ‘layer 2’ payment protocol or ‘Bitcoin superstructure’. In other words, it is a technology on top of a blockchain-based cryptocurrency such as Bitcoin.
This technology or payment protocol tends to make BTC transactions faster and also solve the Bitcoin scalability problem. The problem refers to the limited capability of the Bitcoin network so that it can’t handle large amounts of transaction data.
Technically, Lightning Network allows for recording transactions between pairs of users outside of the blockchain to confirm the deal as quickly as possible. While Bitcoin can handle about seven transactions per second, it is possible to handle up to 1 million transactions per second through Lightning Network.
Apart from transaction speed, Lightning should bring network automatization and transaction cost reduction.
There are some concerns about Lightning Network security, we’ll talk about it in a minute.
How does Lightning Network work?
The whole Lightning Network Bitcoin payment protocol is about the creation of a peer-to-peer payment channel between two parties.
Both parties make a 2-out-of-2 multi-signature transaction on the blockchain. And at least one party should lock a certain amount of Bitcoin into the network to create the payment channel.
Each party has a private key, and a transaction can only be made if both keys are confirmed. The first transaction opens a channel for around 10 minutes, and after that parties can immediately trade with each other using the BTC in the channel.
Each transaction is valid as long as it’s added to the network and recorded in the blockchain by the network’s nodes.
So the payment channels allow participants to transfer money to each other without having to record all their transactions’ details on the public blockchain. And that’s quite easy and quick.
Who runs the Lightning Network?
Researchers Thaddeus Dryja and Joseph Poon proposed the Lightning Network idea in 2015. Since 2016 Lightning Network is developed by Lightning Labs.
Lightning Labs has less than 30 employees today. They have recently raised funds to enable stablecoin transfers through the network.
The new protocol dubbed Taro should make the Lightning Network much more efficient and widely adopted. Lightning Labs co-founder and CEO Elizabeth Stark thinks that Taro will allow individuals to send and receive stablecoins that represent their domestic fiat currency through mobile applications.
Lightning Labs won’t issue their own stablecoins though. But Taro should provide the infrastructure for stablecoin transactions.
“If I were Visa, I’d be scared,” Stark said.
According to her, there are a lot of people out there that have mobile phones, but now don’t need to tap into the traditional system. And the merchants don’t need to pay the 3% fee plus 30 cents for a transaction. You can have fees that are dramatically lower than the legacy system, Stark emphasizes.
How can I use Lightning for Bitcoin transactions?
All you need to do is just install one of the Bitcoin wallets with Lightning Network support. And that’s pretty much it.
If you want to make transactions using the Lightning Network you only have to send some BTC (for instance from your Coinbase account or any other platform) to a Lightning-compatible wallet.
There are dozens of such wallets with custodial and non-custodial options we already explained.
For the custodial one, you can choose something like Strike, Blue Wallet, Wallet of Satoshi, etc. And there are also non-custodial Lightning Network wallets like Muun, Breez, Phoenix, Zap, etc.
Lightning addresses are the same as ‘regular’ Bitcoin addresses, and the payment process is pretty much similar.
But transactions inside Lightning are way faster. And the typical fee is like fractions of a cent.
Are there any exchanges with Lightning support?
As of now, popular crypto exchanges are not in hurry to support Lightning for Bitcoin transactions.
But at the end of March 2022 Kraken has integrated Bitcoin’s Lightning Network. Kraken is one of the most popular crypto exchanges in the US that operates since 2013.
Kraken joined the Lightning Network with its node – LND. So now users can deposit or withdraw up to 0,1 BTC (or 10 million satoshis) per transfer.
That’s kind of a limited option (nearly $4000 right now, huh), but it’s better than nothing.
According to Kraken’s product manager Pierre Rochard, Lightning Network is much more energy-efficient. You’re not adding the miner fees, and thus the amount of electricity consumption by miners.
Who uses Lightning for Bitcoin right now?
You have probably heard about El Salvador, the first country to adopt Bitcoin as national currency.
But few people know that the decision about legalization followed the success of the Bitcoin Beach ecosystem in Playa El Zonte beach that used a Lightning-based wallet.
El Salvador has created Chivo wallet which is fully Lightning Network compatible. Its purpose is to enable seamless cross-border payments and reduce Salvadorans’ money transfer fees.
Chivo is one of the most-downloaded apps in El Salvador.
In mid-march 2022 the Lightning Network passed 3500 BTC capacity which coincided with the Bitcoin price jump.
After El Salvador’s adoption, McDonald’s and Starbucks joined the Lightning Network ecosystem. As of March 2022 more than 80 million people had access to Lightning payments through applications like Chivo, Paxful, and Cash App.
Considering that in the world now about 180 million people use Bitcoin, that’s quite a number.
As of February 2022, there was $1.3 billion worth of BTC locked inside Lightning Network.
What about Lightning issues?
While fees inside Lightning Network are miserable, it can be annoying to pay high costs while sending your BTC to a Lightning-compatible wallet.
That’s can scare off new users and those who don’t want to hold a lot of BTC on Lightning wallets.
Secondly, you have to actively close a channel to pull some funds back. It’s impossible to pull out a little bit of money and leave the channel open. So you have to withdraw all the BTC from the open channel, and that means more fees for any extra payments.
And probably the main problem is that you have to be online permanently to avoid fraud. The Lightning nodes must be online for the network to work, and closing a channel takes some time.
For example, if one channel participant closes it while the other is offline, the first can steal the funds. And that is a bit of a problem for the Lightning Network security.
It’s also worth mentioning that Lightning crypto software isn’t perfect yet, some users have reported transfer stuck or verification errors.
So is the Lightning Network the future of Bitcoin?
While the Lightning solves some crucial Bitcoin problems like transaction speed and fees, it also has issues for regular customers.
Besides the unfriendly online ecosystem Lightning is a huge subject for regulators, as they struggle to make it clear.
Despite that, the Lightning adoption is on the rise as it gives people the opportunity to pay with BTC as comfortably as possible.
Taking into account current developing projects inside the Lightning Network, it surely has a chance to become a hit for the community.
If all existing problems are solved, of course.
Sources: TechCrunch, Cointelegraph, Medium, Bitcoinmagazine, Coinbase, Coindesk