You may have heard of the Bitcoin Lightning Network recently in some crypto news outlets. It has been developed and gaining quite a bit of traction, and for good reason. Since its inception, the Bitcoin network has only been able to process about 7 transactions per second. Compare this to Visa’s 2,000 – 4,000 transactions per second (TPS), with a capacity for ~56,000 TPS (but it never requires that capacity). With Bitcoin’s initial mandate of being peer-to-peer cash, 7 TPS is simply not sufficient to reach such a goal.
Why does Bitcoin process so few TPS? Why can’t it scale like EOS and NEO or XRP? That’s a great question, with quite a complicated answer. I’ll explain in a non-technical fashion to keep things simple. It comes down to a couple of key points:
- Proof-of-work (PoW)
Proof-of-work, as you are likely aware, is the function that the Bitcoin nodes must compute an arbitrary mathematical problem of increasing difficulty to validate the next block on the blockchain. This requires a little time and a lot of energy. It also provides extremely robust security, since, in order to have a 51% attack, a bad actor would need massive amounts of money, computing power and energy resources. There is a lot of debate as to whether or not PoW is bad for the environment or if it’s worth maintaining etc.
In my opinion, briefly, I think that the Bitcoin network itself is doing alright. It’s my understanding that the vast majority (>75%) of Bitcoin miners are using renewable energy that was otherwise not being used. Additionally, securing a worldwide, open, decentralized, uncensorable financial network seems well worth the cost of the renewable energy. If it will simply pollute the world to oblivion then I would 100% change my stance on this.
On to decentralization. The speed of a blockchain network and the level of decentralization has typically been an inverse relationship (except with XRP). Generally speaking, the more decentralized a network, the slower it runs due to the necessity of all validator nodes agreeing and communicating (again, as a very non-technical explanation). A network may gain speed at the sacrifice of decentralization, and decentralization was one of the main points of cryptocurrency. Networks such as EOS and NEO have achieved significantly greater speeds, but their networks are laughable in security and decentralization compared to the Bitcoin network. XRP has managed to achieve a highly decentralized and rapid network by using PoC (proof-of-consensus), but that is a discussion for another time. Bitcoin already exists and it started with PoW, and so it must move forward from that framework.
Enter the Bitcoin Lightning Network. First of all, what is the Bitcoin Lightning Network? Why is the lightning network important? Who is using the lightning network and what are the prospects of the lightning network? Here is a link to the official Lightning Network, but its got a lot of technical jargon. Feel free to visit that site to confirm details, but I would love to go through it simply here on Markshire Crypto.
What is the Bitcoin Lightning Network?
In a nutshell, the Bitcoin Lightning Network is a side chain that connects to the main Bitcoin blockchain. It is considered a “Layer 2” payment protocol. Individuals and groups can open up a “payment channel” that allows them to transact in BTC between them for any duration of time and all of these transactions are completed “off-chain”, that is off the main bitcoin blockchain. When the payment channel is closed, the final “ledger” or state of accounts between the individuals in the payment channel is recorded onto the main bitcoin blockchain.
The payment channels are opened between nodes, and each node can have multiple payment channels connected to it. This creates a web-like virtual structure where payments can be funnelled between multiple nodes through the most efficient channel possible. The illustration below may help.
Because the transactions occur off the main blockchain, they are exceedingly cheap and lightning fast (pun intended). It may seem cumbersome to have to set up a payment channel all the time in order to make purchases with BTC. However, the thought is that once the Bitcoin Lightning Network is sufficiently widespread, the payment channels will become interconnected and you would not need to set them up all the time.
Since the transactions on the Bitcoin Lightning Network are off the main Bitcoin blockchain they are inherently less secure than being on the main blockchain. For this reason, it is currently thought that large, important transactions (i.e. purchasing a property/house, or vehicle or insurance) might occur on the main Bitcoin blockchain; while the Bitcoin Lightning Network would be ideal for smaller everyday type purchases such as groceries, coffee and your cell phone bill.
Why is the Bitcoin Lightning Network Important?
Since the dawn of Bitcoin scalability has always been an issue. At 7 TPS there is no way that Bitcoin, as a currency, would scale to a borderless, uncensorable, open, peer-to-peer, free digital cash. There have been contentious hard forks over the scaling issue, which brought us BTH (Bitcoin Cash), increasing the TPS from 7 to 61. Still utterly insignificant.
At the end of 2017, and very early 2018 during the cryptocurrency market peak and absurd bull run, the Bitcoin network was clogged. I couldn’t give you an exact number, but it was well over 100,000 transactions backlogged. Bitcoin became so popular, but it was not able to scale to accommodate all of the transactions on it. This caused transaction delays of days to weeks! People had their money/BTC in limbo and were not sure when/if they would see it. This is exactly the problem that BTC is trying to solve! Yet it was the problem… at least back then.
Proposed in 2015 by Joseph Poon and Thaddeus Dryja, it has been in development ever since by multiple companies with at least 3 implementations of the Bitcoin Lightning Network in different protocol languages – all interoperable.
The Bitcoin Lightning Network:
- Reduces transactions speeds to near instantaneous, being able to compete with the likes of Visa, Mastercard, and PayPal.
- It reduces transaction fees to near free, and I mean fractions of a penny, or actually free.
- It puts scalability into hyperdrive, potentially up to >1,000,000 (yes, one million) transactions per second. That puts Visa to shame.
These are critical advancements in the Bitcoin protocol and will allow it to support mass adoption. Additionally, there are two more applications about the Lightning Network that make it very interesting: Streaming money, and other blockchains.
Streaming money. That’s right. Just as we used to go to Blockbuster’s and pick a movie, which for those of you old enough to remember, back then was a physical rectangular thing that you put into a VCR, much like you would put a DVD into a DVD player… Now we have YouTube, Netflix, Crave TV, Spotify, etc where you can stream movies, TV shows and music without having to hold a physical copy or even digital backup of the data. Today we are paid from our jobs/work on a weekly, bi-weekly, monthly or even quarterly. Imagine if you are salaried and your money is streamed to your account 24/7? So you’d receive micropayments on a continuous basis that would amount to your full monthly salary over 30 days.
Other blockchains – The “Bitcoin Lightning Network” can simply be referred to as the “Lightning Network” since this technology is compatible with any blockchain. Theoretically, Ethereum, XRP, Bitcoin Cash, EOS, NEO, ADA could all be used the Lightning Network to adopt immense volume and speed.
However, the Bitcoin Lightning Network, while operational and having a large number of payment channels open, it is not fully integrated in the crypto industry, let alone widespread over the world. Opening a channel is a little too complex for the average person (myself included).
Drawbacks of the Bitcoin Lightning Network:
Unfortunately, it’s not all sunshine and satoshis. As with any new technology, there are drawbacks.
- It remains quite complicated to set up a Bitcoin Lightning Network node.
- Each payment channel is capped at the value of BTC that was used to set up the channel. I.e. if only 0.5 BTC was used to set up the channel, then you cannot send 0.55 BTC through it, you can only send denominations less than 0.5 BTC (so 0.01 BTC, 0.2314 BTC, 0.35 BTC, 0.4234 BTC etc)
- The possibility of centralization with large nodes for large value transactions. This is considered an unlikely scenario since once the Lightning Network is fully (or more fully) developed, it should be easier for anyone to set up a node, which is significantly easier and different than mining.
How Widespread is the Bitcoin Lightning Network?
The Bitcoin Lightning Network has grown tremendously in the last 13 months. While it launched mid-January 2018, it had ~1000 nodes by the middle of April 2018. Today, near the end of January 2019, there are ~5,600 nodes, with 21,900 channels and network capacity of ~565 BTC. Stats found at “Real-time Lightning Network Statistics” site. This is more than a 5-fold increase in about a year. If this exponential growth continues, and market sentiment/BTC value improves, then I expect that we can expect to see options for BTC payments at local stores by mid-2020 to mid-2022.
Seems like a far off estimate, but the Bitcoin Lightning Network is still in its infancy, and while working well, it still has to be used more to sort out flaws and it will need time for growth of the network and social adoption of BTC as payment.
What’s Next for the Bitcoin Lightning Network?
As I mentioned the Bitcoin Lightning Network is still in its infancy. However, it is growing very rapidly and has already been in development for over 3 years. I believe, in simple terms, the next steps are continued testing of the Lightning Network with continued adoption in low-value payments on a testnet. There will be growth in Lightning Network nodes as well as the growth of payment channels. There will be an increased volume of transactions and slowly increased BTC value per transaction.
I think that 2019 will see more development and deployment of Lightning Network, perhaps with other cryptocurrencies adopting it. And then I believe in 2020/2021 we will see people using the Lightning Network for payments in public start to grow, such as using BTC or ETH or XRP to pay for coffee or lunch or filling your car with gas etc.
Below I have included a talk by Andreas Antonopoulos on the Lightning Network and his concept of streaming money.
A talk by Andreas Antonopoulos on the Bitcoin Lightning Network:
Please let me know if you enjoyed this post and if you have any questions, comments or knowledge to add.