As the best performing asset class in history, Bitcoin has trounced the competition and silenced its critics through growth and adoption. . Over the last 12 years, especially in the wake of COVID-19, Bitcoin has proven to be a reliable store of value in a world beset by money printing and inflation. Yet, even the king has his Achilles’ heel, which in the case of Bitcoin is the limited amount of transactions it can process per second, a limitation that could negate its adoption as the dominant payment method. While contenders to the throne point to their shiny technology that promises superior speed and scalability, Bitcoin has a superpower up its sleeve to facilitate its elevation to the global money benchmark – flashes of Lightning.
What is the Bitcoin Lightning Network?
The Lightning Network is built on top of Blockchain technology and enables exponentially faster and cheaper Bitcoin transactions. The average Bitcoin transaction takes between 20-60 minutes, while the Lightning Network executes transactions virtually instantly for a fraction of the cost through its network of payment channels.
Bitcoin’s scalability concerns
The Bitcoin scalability issue refers to the limited ability to quickly process massive volumes of transaction data on its platform. The transactions on the bitcoin network get stored in bitcoin blocks which are produced every 10 minutes. Block space is limited to around 1 MB, and you can only get a certain number of transactions through each minute and must compete with other users to get yours included in a timely way. These limitations keep Bitcoin at a meager 4.5 transactions a second. When you compare that to networks like Visa that can process an estimated 24,000 transactions each second, it becomes clear that the Bitcoin network is at a disadvantage as a payment network.
How the Lightning Network Works?
At the center of Bitcoin’s scalability challenges lies that every transaction has to be broadcasted to the entire Bitcoin network, causing a bottleneck in transaction validation and slowing the whole network down. The Lightning Network lightens the load off the main Bitcoin blockchain with a network of payment channels. Instead of broadcasting every transaction to the entire network, Lightning Network members only broadcast a transaction when they open or close a channel between them.
Opening a channel: Two people can open a channel between them and fund it with a certain amount of sats (Satoshis) each. The transaction is recorded on-chain, including the balance between channel participants. Once the channel is open, the two proceed to trade between themselves, keeping a ledger of the transactions as they happen.
Closing a channel: When the two wish to close the channel, a transaction is broadcast to the entire network, including the updated amounts that each person took out of the channel after all the exchanging.
Hopping between channels: While opening a channel between two users is handy, that’s not where the magic lies. Lightning’s advantage is that you don’t even need to have a channel open to transact with someone. Instead, Lightning Network can utilize existing channels to get your money to the recipient through smart routing.
The Great Scaling Advantages of Lightning
Powered by Lightning, Bitcoin can suddenly scale way beyond three transactions per second. As a layer-two solution, the Lightning Network looks to be the most practical way to scale the Bitcoin network. It’s not easy to coordinate modifications in such a large ecosystem; there’s a possibility of hard forks and potentially catastrophic flaws. Experimentation is risky when so much is at stake. You have a lot more freedom when you take that experimenting away from the blockchain. If something goes wrong, it won’t affect the Bitcoin network at all. Layer two solutions do not risk any of the protocol’s security assumptions, which have kept it alive for almost a decade.
In addition to its second-later design, using the Lightning Network has several advantages:
Micropayments: For micropayments, the Lightning network is a lot more enticing. The costs of frequent transactions make sending small amounts on the main chain unfeasible. Within a channel, you may transfer a fraction of a Bitcoin for free. Micropayments can get used for a variety of purposes.
Privacy: Another advantage of the Lightning Network is that it may provide users with a high level of privacy. Parties are not required to make their channels available to the rest of the network.
The Value Superhighway of the Future
Ever since the president of El Salvador gave the Lightning Network a prominent place in his national Bitcoin strategy, the second-layer scaling solution for Bitcoin has been cast once again into the spotlight. With nearly 13,000 nodes worldwide, the Lightning Network is becoming a player on the world stage by offering solutions for countries like El Salvador, Nigeria, the Philippines, and many other countries searching for a peer-to-peer alternative to their flawed national money systems. Even tech giants like Twitter are eyeing Lightning Network’s potential as the payment infrastructure of the future.
Through the past historic 18 months, Bitcoin has served as a bulwark of scarcity and value against a torrent of liquidity pumped in to keep the economy afloat during COVID-19 drawdowns. As a store of value, it continues to display the characteristics of a hard inflation hedge. Powered by Lightning, Bitcoin could very well take the next leap forward into reserve currency dominance by becoming the world’s preferred means of payment.