Last updated on July 5, 2022
The Lightning Network is a second-layer protocol that has been in the news a lot as of late. This off-chain network has been seen by many as Bitcoin’s saving grace in terms of scalability issues. So what makes the Lightning Network so revolutionary and why do so many Bitcoiners hold this second layer protocol in the highest regard? Here is some valuable insight into the Lighting Network and how it can help relieve Bitcoin congestion issues.
One of the biggest advantages the Lightning Network brings to the market is the fact that it enables Bitcoiners to enjoy micropayments in near real-time. Sending micropayments is a crucial component of any digital economy. It also provides Bitcoin with more flexibility and trackability as users can send value rather than just data. Micro-payments are in use in several Dapps, games, and other Bitcoin protocols at this time
Additionally, the technical structure of the network reduces fees to just a fraction of the cost of a normal Bitcoin transaction. Sending a transaction on the Lightning Network can save you 90% in fees versus a regular Bitcoin transaction. Consequently, the Lightning Network has found many uses in today’s market, especially for those who conduct frequent and large transactions.
High-Volume Bitcoiners Profit
The Lightning Network is ideal for high-volume Bitcoin transactions. Large Bitcoin investors have turned to the Lightning Network to improve their ROIs when making large multi-layered purchases of the cryptocurrency. They will often break these purchases up over much smaller maneuvers that are geared to help drive the value up of the currency as the transaction proceeds.
Additionally, the Lightning Network has also played a critical role in pushing the Bitcoin gaming sector to new heights. It would be impossible to include real Bitcoin in games without the use of the Lightning Network to facilitate micro-payments and fast transactions. Nobody would want to play a game that made you wait for a day to receive your assets. The Lightning Network provides the fast-paced transactions needed to support a gaming atmosphere.
Why Bitcoin Needs the Lightning Network
Bitcoin needs the Lightning Network to meet the needs of the international community. No one can argue that Bitcoin is very secure. However, it’s not exactly fast. The network can handle around 7 transactions a second. In comparison, PayPay and VISA can sustain over 30,000 tps. The sheer difference in transaction volume is enough to see why a solution was needed to scale Bitcoin to meet the needs of the international community.
Unfortunately, this lackluster throughput has landed Bitcoin in some uncomfortable positions and made it unusable at times. It has also stalled merchant and corporate adoption as nobody wants to accept a currency that takes hours to process with varying value throughout that time. Merchants and users need near real-time transactions to use Bitcoin as an electronic cash system as Nakamoto suggested in the Bitcoin whitepaper.
Bitcoin’s Technical Structure
Part of the reason for this congestion is the fact that Bitcoin has a 1MB blocksize constraint. This 1MB blocksize was part of Satoshi Nakamoto’s original Bitcoin strategy. He felt that this blocksize enabled anyone in the world to participate in securing the blockchain. This open approach to the market is one of the main factors that made Bitcoin a success initially.
However, the 1MB blocksize reduces the network’s capabilities considerably. It can lead to miners, the network nodes that approve Bitcoin transactions, cherry-picking the highest paying transactions to process. When this occurs the gas price for Bitcoin transactions goes through the roof. The last time this issue became a problem, it eventually turned into a massive debate that split the Bitcoin community in two and spawned the launch of Bitcoin Cash.
The network’s congestion concerns have long been in the scope of its core developers. Back as early as 2015, Bitcoiners began to sound alarm bells regarding the structure of the network. Mainly, Bitcoin was designed to increase its fees as a way to combat congestion. This strategy worked originally because it helped to reduce the amount of spam on the blockchain. However, this approach does little to help the community when the congestion is based on legit transactions.
A New Concept is Born
The history of the Lightning Network begins in February 2015. This is when two very well-known blockchain developers named Joseph Poon and Thaddeus Dryja first introduced the concept to the masses. Originally, the concept began as a discussion on ways to reduce Bitcoin network congestion without increasing the network’s blocksize. In, January 2016, the researchers released the Lightning Network whitepaper officially. Notably, this was a full year before the issue turned the community into a battleground.
By 2017, Bitcoin’s scalability issues became unavoidable. At that time, the crypto market was having a breakout year. Bitcoin had seen its value skyrocket to over $20,000. The world’s first cryptocurrency was going mainstream and new investors were eager to get in on the profits.
All of this excitement led to a flood of new users. In turn, this bogged Bitcoin’s blockchain down. Eventually, it became so slow that it was taking days for transactions to complete. Traders were furious because they would conduct a transaction and by the time it was completed, the market was in a completely different state.
Additionally, the gas fees were through the roof. It was impossible to send small portions of Bitcoin to others because the cost of doing so would often outweigh the actual value you were sending. As you could imagine, no merchant could accept Bitcoin if it would take days to receive the funds and there was no telling how much the value of the coin would change during the delay.
Solutions Needed
As such, this congestion eliminated Bitcoin’s ability to function as a peer-to-peer electronic cash system for some time. It led to a backlash from merchants who at first embraced digital currencies. Now, they were upset due to losses and delays that they saw as inherent issues in the system.
If Bitcoin was to fulfill its destiny, it needed a scalability solution and fast. Developers scrambled to the drawing boards to configure different concepts. It wasn’t long before the Lightning Network was back in the spotlight. It offered the scalability and security that was needed at the time. Additionally, its open-source code made it ideal for future development. Best of all, it lived up to its name. The Lightning Network was much faster and cheaper than Bitcoin mainnet transactions. In most instances, a transaction costs much less than a cent and takes seconds to complete.
Shed Some Light on the Issue
In March 2018, Lightning Labs, one of the three main developers of the protocol, launched the Beta version of the Lightning Network. Notably, the Lightning Network is an open-source project that leverages certain systems to ensure the main developers can work separately but achieve interoperability.
Notably, these firms can work separately and retain interoperability via the use of bolts. Bolts are Lighting Network programming basics. Each firm must adhere to the bolts to ensure that their developments fall in line with the overall goal of expanding the Lightning Network. The developments teams from Lighting Labs, ACINQ, and Elements Projects all began issuing Lightning Network protocols in short succession.
How the Lightning Network Functions
The introduction of the Lightning Network has helped to reduce congestion from the network in many ways. The off-chain protocol leverages special personal payment channels. Users open these channels up directly between each other.
This process was originally a little complicated, with new users often left confused. It required users to fund a channel as the first step. This funding would operate as an insurance policy for the system. Users could conduct transactions up to the amount used to fund the channel.
Once the off-chain channel is open, users can send unlimited amounts of Bitcoin at a fraction of the cost as long as the transactions didn’t exceed the channel value. This approach made the Lightning Network an instant hit. Users and Dapps could leverage this protocol to conduct thousands of transactions for a fraction of the normal price of sending Bitcoin.
The cost reduction comes from the fact that all the transactions made within the personal payment channels don’t post to the blockchain until the channel is closed. In the Lightning Network, you have channel operators. These are the nodes that fund and host the payment channels.
Interestingly, there have been some major developments in this structure since its launch. Nowadays, the payment channel operators can agree to split the funds needed to fund the channel. Additionally, there are a lot more channel providers. These are users and firms that seek to leverage the Lightning Network to improve their user experience.
Merchants Gain
The introduction of the Lighting Network reopened the door for merchants seeking a way to accept Bitcoin. Now, they no longer had to wait hours to receive their crypto. Instead, the Lighting Network supports near-instant payments. Additionally, users can purchase small items using the micropayment functionalities of the system.
Micro-payments are a crucial element of daily use for a currency. Think of buying a pack of gum or a sandwich. To be successful as a monetary system, Bitcoin needed to support these daily activities and more. Micro-payments fill a niche in the Bitcoin ecosystem that was long left unattended. Today, Bitcoin users leverage micro-payments for a variety of different reasons from sending value, to conducting gaming and other activities.
The Top Benefits of Lightning Network
One of the biggest advantages of the Lighting Network is its custodian-free design. The network has no central authority and is censorship-resistant. As a non-custodial solution to Bitcoin’s scalability problems, the Lightning Network strengthens the security of users and improves their functionality.
Non-custodial exchanges are ideal for many reasons. For one, users never have to send their currency to a third party to make transactions. When you use a custodial exchange, your funds are held by a third party. If the network goes down, gets hacked, or even has maintenance to attend to, you can be separated from your crypto for hours, days, or worst of all, permanently.
Non-custodial protocols are now commonplace in the cryptomarket, but this wasn’t always the case. The rise of the DeFi (decentralized finance) sector helped to normalize this approach, as these networks were built to empower users and protect their wealth. Today’s Lightning Network users enjoy more protections and privacy thanks to this structure.
It’s all About Scalability
Additionally, the network provides unmatched scalability for Bitcoiners. The off-chain structure of the Lightning Network gives it near limitless scalability. This off-chain protocol has already been integrated into several top-performing platforms and exchanges with great success.
Expandability was always a concern for Lightning Network developers. As such, the protocol can scale up to millions of tps (transactions per second). As such, it surpasses today’s top-performing credit card networks and more. This flexibility and high performance will help to keep Bitcoin relevant as faster competitors are already available in the market.
Bitcoin Gains More Functionality
Another major benefit the Lightning Network brings to the table is the addition of new features. The Lightning Network enables developers to create and leverage smart contract programming on Bitcoin’s blockchain. This is a major upgrade as Bitcoin launched long before smart contracts were a main feature of blockchains. Developers can now build Bitcoin-based Dapps that expand the features of the network
Also, the Lightning Network supports direct on-chain coin exchanges via submarine swaps. Submarine swaps are one of the fastest and most direct ways to swap tokens across blockchains. This technology gives Bitcoin more interoperability in the market and reduces the cost of trading tokens.
The Lightning Network is Easier than Ever
Over the last few years, the Lightning Network has seen considerable development. Although the network is technically still in Beta testing, it’s already in use across multiple platforms. Today, there are hardware LN nodes, mobile wallets, games, and much more supporting this off-chain protocol. You can expect to see even more Lightning Network support as users continue to seek out cost-effective Bitcoin strategies in the market.