Bitcoin (BTC) has changed the world as a decentralized, non-governmental form of currency that can facilitate peer-to-peer (P2P) transactions that transcend national borders.
But despite this feature, Bitcoin’s role as a payment mechanism has been questioned due to its low transaction throughput.
The Bitcoin blockchain can handle up to seven transactions per second, which means network demand has seen average transaction fees on the network hit an all-time high above $62 during specific time periods.
In order to cope with low throughput and high transaction fees, developers created the Lightning Network, a Layer 2 scaling solution that enables off-chain transactions.
The Lightning Network creates a P2P payment channel between two parties in a transaction. The channel “allows them to send an unlimited number of transactions that are nearly instantaneous and inexpensive. It acts as its own little ledger allowing users to pay for even smaller goods and services such as coffee without affecting the Bitcoin network.
Network users lock a certain amount of Bitcoin in order to create a channel. Once the BTC is locked, recipients can charge whatever amounts they need.
To some extent, the network is seen as a solution to Bitcoin’s scalability problem, but adoption has been somewhat slow. The network currently has 87,000 payment channels and 4,570 BTC locked, worth more than $111 million, compared to 19.1 million BTC in circulation, which has a market capitalization of more than $460 billion.
Despite its slow adoption, the network has the potential to outperform existing payment solutions.
Lightning Network Transaction Throughput
Payments giants like Visa and Mastercard are used to process payments worldwide. Mastercard’s network is estimated to process up to 5,000 transactions per second, making it far superior to Bitcoin’s seven per second.
Visa’s transaction throughput is even more impressive, processing up to 24,000 transactions per second. In a recent interview, Visa CFO Vasant Prabhu said the network could, in theory, handle up to 65,000 transactions per second.
The Lightning Network goes much further, however, processing up to 1 million transactions per second, making it the most efficient payment system in the world in terms of transaction throughput.
RACE OF THE RAILS ♂️
£2.20 charged at both outlets.
WHO WINS?? ⚡️ ⚡️
— Joe Hall (@JoeNakamoto) July 25, 2022
Cointelegraph reporter Joseph Hall conducts an impromptu test of the Lightning Network against contactless fiat payments.
Speaking to Cointelegraph, Ovidiu Chirodea, CEO of Romanian cryptocurrency exchange Coinzix, noted that the network marks the next phase in the evolution of money. According to Chirodea, first there was gold, which was a store of value but was not a practical medium of exchange, with fiat money next being a practical medium of exchange.
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Bitcoin, Chirodea said, was an evolutionary step that created a new store of value, with the Lightning Network serving as a platform to become a medium of exchange as well:
“Visa charges companies about 3% to process payments, so I think the Lighting Network is a game changer. Businesses will increase their revenue by using it, and it’s not something you can ignore. »
He noted, however, that the scalability of the network “isn’t that great,” as users have to open a channel with each party and attach BTC to it, which affects their liquidity. In his words, cash tie-up can be avoided by “using other lanes and other payment channels”, but the solution “is not very scalable, as payment channels keep opening up and close”.
Thomas Perfumo, head of trading operations and strategy at Crypto Exchange Kraken, told Cointelegraph that since the company launched Lightning Network support in April 2022, it has “regularly increased the capacity of the network” to the point where it it is now the fifth largest knot on the Lightning. Network:
“We currently have over 800 channels open that can facilitate over 18 billion satoshis of payments. Customers regularly fund their accounts through the Lightning Network on a daily basis.
Perfumo added that the exchange sees the Lightning Network as “essential to building a permissionless payment system that will ultimately help accelerate cryptocurrency adoption around the world.”
Although the benefits of the Lightning Network in terms of transaction throughput are now clear, it has some notable drawbacks.
First, opening a Lightning wallet and funding it may not be as simple or as ingrained as opening a bank account and using a debit card.
Additionally, funding a Lightning Network wallet requires users to send BTC from a traditional Bitcoin wallet, and creating a payment channel involves locking funds.
Once funds are locked in a payment channel, they can transact freely, but funds can only be retrieved after that channel is closed. Additionally, offline transaction scams are possible, as one party may shut down a channel when the other is offline in an attempt to steal funds. Although third-party services can mitigate the risk, they prevent some from entering the network.
Privacy, ease of use and censorship resistance
Keeping these drawbacks in mind, Max Rothman, head of crypto and digital assets at global payment processor Checkout.com, told Cointelegraph that being able to use cryptocurrencies to exchange goods and services “does not is effective only when the crypto can trade hands seamlessly.”
Because the Lightning Network is peer-to-peer, Rothman added, responsibility for the transaction process falls on both merchants and customers. At the institutional level, “it can be difficult and resource-intensive to administer internally without a trusted partner to manage thousands or millions of cross-currency transactions.”
Rothman said solutions like the one used by Checkout.com, which relies on partner companies like Visa to offer on-ramps that enable crypto-to-fiat conversions, are that “bridge that provides a more seamless translation experience.” between Web2 and Web3.”
Bringing the next million or billion into crypto “requires tailored advice, support and solutions that work for all levels of payment needs and recognize the current payment environment in which we operate,” a he declared.
Speaking to Cointelegraph, Bruce Fenton, Bitcoin Foundation board member and United States Senate candidate from New Hampshire, said the Lightning Network “allows Bitcoin to do more transactions” while being “more decentralized and censorship-resistant than centralized companies”. or most other channels.
Asked about the pros and cons of using the Lightning Network compared to solutions from companies like Visa, Fenton dismissed Visa as “fully centralized,” meaning it can “be shut down or censored.” While centralization might be a concern on the Lightning Network for some, he said it doesn’t affect the Bitcoin blockchain itself and added:
“It’s mostly about the money you build on and build for. For those who believe in Bitcoin as the superior currency, LN is the best-known scaling solution.
Chad Barraford, technical lead at decentralized liquidity protocol THORChain, told Cointelegraph that when checking out at online stores, the Lightning Network allows for a “cash” option, in which “no other parties participate, no exorbitant fees. and substantial privacy benefits”.
He said the network is “not solely driven by the best interests of shareholders or board members,” but serves the interests of its participants as a public good, adding:
“Visa is a financial institution that inherently seeks profit and control and is at the behest of governments. The Lightning Network is purely a public good. It exists solely to provide a fundamental and essential service to every person on the planet in need of access to financial services.
The adoption and success of the Lightning Network is “closely tied to the Bitcoin network itself,” Barraford said. He thinks that as the world sees BTC less as a speculative asset and more “as a currency to buy items”, inflationary pressures “drive more and more people into the Lightning Network”.
Although the comparison with networks such as Visa or Mastercard is clear from these answers, it should be noted that some of these arguments apply to other solutions such as PayPal, which may be forced to freeze customer assets. or charge higher fees, for example. .
Blockchain technology has developed over time to the point that other blockchains are also able to compete with Visa’s transaction throughput without seeking to profit from it.
And the other channels?
Speaking to Cointelegraph, Fenton hinted that the Lightning Network stands out as “more decentralized and censorship-resistant” than most other blockchains.
Decred co-founder and project lead Jake Yocom-Piatt built on this idea, telling Cointelegraph that other blockchains are unable to match the qualities of the Lightning Network.
Yocom-Piatt claimed that the high-speed Solana blockchain, with a theoretical throughput of 710,000 transactions per second, is a “centralized, non-custodial blockchain that requires its validator nodes to run in data centers on high-end hardware. range”. Comparing Bitcoin, Solana and Decred himself, he said:
“Of these three, Lightning Network is the most decentralized, the most sovereign, and the most aligned with the original ethos of the cryptocurrency space. Solana sacrifices most of its decentralization via its heavy validation node requirements, but at least it doesn’t seem to be able to arbitrarily censor users and marketers.”
Whatever the future, it is clear that innovation in cryptocurrencies is increasing transaction throughput. Whether users will end up choosing to sacrifice privacy and immutability for convenience remains to be seen.
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As it stands, more practical solutions are available. It is now easier to use layer 1 blockchains for payments through centralized entities that convert crypto assets into fiat currencies at the point of sale.
For the Lightning Network to gain a wider audience, more services will likely need to support it. Major exchanges like Coinbase, Binance, and FTX have not followed in the footsteps of other exchanges in adopting the network, hampering its growth. As the network relies on more payment channels to continue routing transactions, other centralized payment networks and providers are likely to remain ahead.