Are you utilizing the most talked-about Layer 2 solution for Bitcoin?
The Lightning Network is a second-layer built on top of the Bitcoin network, so it can also be referred to as a Layer 2 upgrade. Be careful using the terms Lightning Network and Layer 2 interchangeably, as there are many types of Layer 2 solutions.
Can Lightning Strike Twice?
It’s important to understand why the Bitcoin community made the decision to create and utilize the Lightning Network. This decision was an essential part of successfully carrying out a truly impactful mission.
Bitcoin’s mission is to democratize wealth across the entire globe. More people need to understand the reasoning behind the technical evolution of bitcoin’s blockchain, to take advantage of the features and benefits of bitcoin. Once this is achieved, the change will come naturally to users and ultimately increase the adoption of decentralized currencies.
Why We Need the Lightning Network
When Bitcoin was in its early days, the original Bitcoin blockchain didn’t need any upgrades. Not many people were using it, and few believed that this mysterious digital currency would lead to a completely new asset class. Bitcoin was an experiment.
Today, a growing number of people believe Bitcoin can challenge the world’s largest banks and payment providers. However, one of the obstacles standing in the way is issues with scalability and transaction speed. Trusted payment providers like Visa and MasterCard can process more than 47,000 transactions per second. Bitcoin’s blockchain can handle less than five transactions per second.
Seven transactions per second were more than enough in 2008 (when only a few people were using Bitcoin). Now that adoption is progressing; the Lightning Network implementation is meant to take things to the next level.
Bitcoin Transactions in a Flash
In order to understand the impact of the Lightning Network, wrap your mind around a few of the technical aspects of the network’s functionality.
Nodes on the Bitcoin network and programmers in the community are dedicated to making the day-to-day use of cryptocurrencies easier. This means they will continue to build easy-to-use apps and interfaces that simplify exchanging value on the blockchain.
The Lightning Network solves scalability by processing the smallest everyday transactions on the Bitcoin network. The network finds the fastest way to route a transaction to the receiver automatically. Transactions don’t happen on the blockchain, but “off-chain” using payment channels. This means several small transactions can then be registered on the blockchain without the need for nodes to validate every small transaction individually.
Pros & Cons of the Lightning Network
As with any technical upgrade to a blockchain, there are always risks and rewards to consider. The Lightning Network upgrade is no exception.
Lightning Network Pros:
- It reduces the overall load on the blockchain.
- It only needs two transactions to be ‘on-chain’ — one to open a payment channel, and one to close it.
- Since both parties have a running balance of the transactions in a shared multi-signature address, each party can remain trustless and protected from manipulation and theft.
- Parties still need to have sufficient funds to complete transactions.
- Lightning Labs released a Lightning Network Daemon recently that allows nodes to open and close channels.
- Nodes can pick the best routing path automatically, making the transaction times faster.
Lightning Network Cons:
- Transactions can’t be made offline. If you don’t have internet access, you can’t use it. The U.N. estimates that 52% of the world still isn’t online.
- Detractors think Lightning Network allows nodes to become large payment hubs, which might centralize power.
- Lightning Network isn’t built for large lump sum payments.
Let Lightning Strike!
As we’ve seen in crypto, there is no such thing as a perfect system or a perfect upgrade. The Lightning Network does have challenges ahead, but the benefits outweigh the downside tremendously. Let this be the most important takeaway about the Lightning Network:
Bitcoin is now one step closer to mainstream adoption and continues to challenge the world’s oldest and most used payment systems.