Bitcoin Lightning Network: What It Means For The Crypto Community

Mateusz Raczyński
10 September 2021 · 8 min read

Bitcoin had quite an eventful phase in the first half of 2021. At one time, it crossed $60K, and in a few months, it plunged below $30K. Picking up again, the price has now crossed $50,000, with a market cap of $940,301,313,373. However, despite being the most famous cryptocurrency, the bitcoin network has certain limitations. Scalability, for instance, is a significant issue.

Because Bitcoin doesn’t scale at its core, it serves as a powerful long-term investment asset. But this also makes it difficult to use bitcoin for day-to-day transactions like buying our morning coffee or evening pizza or send money to someone. The scenario is changing rapidly, though. The Lightning Network enables instant micropayments using Bitcoin a seamless reality. Thus, the obvious question appears: what is it, and where can it take Bitcoin?

The Bitcoin Lightning Network: A Brief Introduction

The Bitcoin Lightning Network is a Layer-2 payment protocol running on the Bitcoin blockchain. The Lightning Network (LN) creates payment channels between counterparties on a second layer, enabling secure and decentralized off-chain transactions. These channels work independently of Bitcoin's blockchain and pave the way for bitcoin users to receive payments without high fees or transaction times. Joseph Poon and Thaddeus Dryja first came up with the LN concept in 2016. Presently, Blockstream, Lightning Labs, and ACINQ are in charge of developing the Lightning Network.

How Does LN Work?

The Lightning Network protocol works with a multi-signature (multi-sig) wallet accessible to two users. If A and B are making a single transaction, they need to deposit some bitcoin into the wallet. After that, there can be innumerable lightning transactions between A and B where the stored funds are redistributed with each transaction. Finally, both parties need to sign to confirm the transaction and update the final balance. Once the payment channel is closed, the final payment is broadcasted to the network and recorded on Bitcoin's blockchain.

However, LN transactions are not so simple and bi-directional always. In reality, LN offers opportunities for an enmeshed web of many transactions among more than two parties, without involving the main blockchain. Thus, if A transacts with C and B transacts with D, then LN makes way for more decentralized network payment routes. This means A can also transact with D, and B can transact with C.

LN makes this possible through smart contracts and multi-sig scripts. When anyone initiates a transaction, a ‘funding transaction’ is made. Unlike in other cases where counterparties exchange signatures and have a set of private keys, the counterparties exchange a single key on the LN. This key is used for validating the spending transactions, also known as commitment transactions. The counterparties only exchange the master keys once the channel is finally closed.

What Makes Lightning Network So Special?

Now that you know what LN is and how it operates, you must be curious about its impact on real-world transactions. So, let’s discuss what makes it so unique.

Instantaneous Transactions

Bitcoin can process about seven transactions per second (TPS). On the contrary, Visa’s peak capacity is roughly 24,000 TPS. Moreover, bitcoin records transactions in blocks at a duration of ten minutes. You will know that your transaction is successfully recorded on-chain after the addition of six blocks, which takes almost an hour. It is impractical to wait at a retail PoS terminal or for any device-to-device transactions for so long.

Bitcoin’s low TPS and delayed block finality have severely hindered mainstream adoption in the past. However, the Lightning Network has solved the issue once and for all. Besides instantaneous transactions, the LN has enabled cross-chain atomic swaps, without any crypto exchanges. The LN supports cross-blockchain transactions as long as both chains have the same cryptographic hash function.

Reduced Transaction Costs

The bitcoin transaction fee keeps oscillating. For example, in April-May’21, it crossed $60 and has now come down to $3. Usually, it hovers around $24-$31. Now, imagine ordering a pizza for $10 but paying double or triple the amount because of high transaction fees.

The Lightning Network enables making transactions for amounts as low as 0.00000001 BTC (<0.01 cents) without charging enormous fees. In effect, the Lightning Network has reduced transaction costs to only one satoshi (1 SAT = 1/100,000,000 BTC). You can use it with the Muun wallet for a simpler and better user experience.

Why is Lightning Network Better for Crypto Microtransactions?

With a nominal transaction fee and near-instantaneous transaction finality, Lightning Network is already gearing up for microtransactions. However, there are specific characteristics inherent to Bitcoin that make it the perfect choice for mass-scale crypto micropayments.

To begin with, Bitcoin has the largest cryptocurrency community and it is the most successful network in the blockchain-cryptocurrency world. All the network participants, including the miners and users, are always willing to develop and maintain a secure network.

While it is true that Bitcoin faced several security challenges and hacks in the past, the network has always emerged stronger and neither of the hacks was successful. Time and again, the community has demonstrated an unwavering commitment to personal data protection and the overall development of blockchain technology.

The Bitcoin blockchain guarantees data immutability, but as we have seen, its scalability shortcoming isn’t conducive to micropayments. In this regard, the Lightning Network liberates the Bitcoin network and community — fast, robust, cost-optimized, risk-free, and decentralized microtransactions are now possible. Furthermore, Bitcoin is constantly evolving, though its underlying technology is more than a decade old. Myriad improvements are underway, and the Lightning Network might be the perfect fit for overcoming the hassles of Bitcoin’s maturing blockchain architecture.

The Advantages Of Using Lightning Network

By now, you may have already figured out the pros and cons of the Bitcoin Lightning Network. Nevertheless, an explicit discussion on this note is pertinent.

Advantages Of Using Lightning Network - Ulam Labs
Advantages Of Using Lightning Network - Ulam Labs

Scalability

First, to reiterate, the LN enhances Bitcoin’s scalability, enabling frictionless microtransactions. As a Layer-2 protocol, the LN facilitates the rapid, risk-free transfer of funds, and that too, at minimal costs. Atomic token transfers of other cryptocurrencies are also possible without involving cryptocurrency exchanges. In other words, the LN realizes the aspect of P2P payments fully.

Transaction Speed

Second, LN might just be the ultimate update that Bitcoin needed so badly. This might solve the scalability issue forever. LN is prepared to surpass MasterCard, PayPal, and Visa TPS by several orders of magnitude. If everything goes well, the Lightning Network might witness 1 million TPS.

Microtransactions

Third, LN might have started with microtransactions, but the technology has far-reaching consequences. It is already catering to the unbanked population in El Salvador and Ethiopia. Gamers are now earning satoshis through the Lightning Network. Users are also earning rewards in satoshis through LN when they recharge their e-wallets.

Privacy & Autonomy

Fourth, LN is poised for a glorious future. Ten years from now, the technology behind the LN might change the way we interact and communicate with each other. Apps like Impervious AI and Sphinx are already demonstrating this potential. Besides revolutionizing VPNs and texting platforms, the LN also changes the Self-Sovereign Identity market through LSAT tokens. It wouldn’t be a mistake to say that more innovations are waiting in the pipeline.

There’s a reason why Elizabeth Stark, CEO at Lightning Labs, said :

“This (Lightning Network) is a technology to empower people...to improve the internet, to make it a better place…... It’s not some billionaire’s playground.”

The Lightning Network Has Its Flaws

Despite being a game-changer in the cryptocurrency industry, the Lightning Network isn’t entirely flawless. There are quite a few things that need fixing before it is widely adopted.

First, although transactions happen off-chain, the final balance is broadcasted to the on-chain ledger for immutable recording. Thus, the closure of payment channels leads to incurring transaction fees in bitcoin. These fees might shoot up any day and lead to an economically unviable microtransaction. However, the Bitcoin Taproot update intends to solve this problem.

Second, both parties must be online to carry out a lightning-based transaction. This can be highly problematic since we are used to asynchronous transactions. For example, while paying for our pizza or transferring money to a friend, the other person needn’t be online. But the opposite is currently valid for the Bitcoin Lightning Network.

Third, there are concerns about LN having complex payment channels, caps on channel funds, and hubs. If these channels become too convoluted, the transaction fee and processing time will go up. Moreover, a channel has a fixed number of bitcoins while opening restricts channel liquidity. Lastly, a concentration of nodes (hubs) might lead to centralization.

Will Bitcoin Lightning Network Dominate Blockchain’s Future?

The technology behind the Lightning Network is undoubtedly groundbreaking. It might move Bitcoin’s adoption further and even strengthen its position as the go-to digital currency for day-to-day payments, global money transfers, as well as a secure layer 1 solution to base dApps on.

At Ulam Labs, we closely follow developments in the cryptocurrency space, acknowledging that Bitcoin’s position might be unshaken for the years to come – and Bitcoin Lightning Network might play an important role in defending against other contenders.

We have vast experience in integrating software with blockchains that you can use for a successful launch of your project. Therefore, if you’d like to build a solution using Lightning Network or any other blockchain– contact us*!

*Just bear in mind that we don’t develop smart contracts beyond Algorand – we’re specialized in integrating blockchains in FinTech applications :)

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Related blogposts:

How to choose the best blockchain for NFT marketplace development?

The landscape of institutional adoption of cryptocurrency

Non-Fungible Token (NFT): A comprehensive guide

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