Although Bitcoin is the oldest, most popular, and well-known blockchain, it’s by far not the best payment solution. It suffers from many problems, such as slow transaction times and comparably high transaction fees, making it impossible to use it as a day-to-day payment settlement layer. The Bitcoin Lightning Network is a scaling solution that attempted to resolve these problems. This article will explore the underlying problem leading to the Lightning Network, how it tries to solve this, and its relevance for Bitcoin.
What is wrong with Bitcoin?
Although, or maybe because Bitcoin is the world’s first public blockchain, it was not designed for mass adoption as a payment solution. One problem is its speed, or the lack thereof. Though Bitcoin transactions might not seem awfully slow – they take one hour on average – they certainly aren’t feasible for everyday payments. Bitcoin’s block size, one of the determining factors for how fast a blockchain processes transactions, is a tiny 1 megabyte. Moreover, its transaction fees make sending small amounts of money on the Bitcoin blockchain not worthwhile. Paying several dollars in transaction fees is acceptable for larger sums of cash but certainly not for small daily transactions.
What is the Bitcoin Lightning Network?
Bitcoin was largely used for trustless transactions between two parties that don’t require an intermediary early on and the solution was to scale the Bitcoin blockchain, in other words to make it possible to send more transactions in a shorter time while simultaneously bringing down transaction fees. This is known as second-layer scaling.
Building a second layer on top of the blockchain to process transactions more quickly and at lower cost is one possible scaling solution. The Bitcoin Lightning Network tries to do this by opening a payment channel between the two interacting parties that allows them to conduct multiple transactions without the cost or transaction times of the Bitcoin blockchain.
Does the Bitcoin Lightning Network work?
This all sounds great. A working scaling solution could make Bitcoin the default blockchain for peer-to-peer payments and replace credit cards and payment solutions. Obviously, VISA and Western Union are still around, so this hasn’t happened. Lightning Network’s problem is its complexity, a prevalence of custodial apps, and, worst, security issues. Several possible security issues have been identified, which has added to users’ hesitance to adopt it as a solution.
However, Lightning developers are still hopeful they can turn the crypto scene’s impression of the Lightning Network around. Bitcoin adoption in smaller countries like El Salvador would help since its citizens are far more inclined to count in satoshis rather than bitcoin. One unit of a local currency in Iran, Vietnam, or Venezuela is worth even less than one satoshi. These countries might not have the same inhibitions to spend bitcoin as richer countries do. Earning bitcoin through blockchain games would be another perception shift that would help Bitcoin shed the “digital gold” narrative. If micropayments via the Lightning Network became feasible and secure, this would kickstart user adoption.
At the end of the day, though, whether the Lightning Network is adopted on a wider scale will largely be decided by the price of Bitcoin and its volatility.