The Lightning Network: why do we need it?
Bitcoin scalability problem
Bitcoin as a digital currency has a lot of advantages but when it comes to scalability the landscape looks not that optimistic. According to Joseph Poon and Thaddeus Dryja, Visa as one of the world’s largest payment systems allowed the processing of 47,000 transactions per second on its network during the 2013 holidays. Nowadays, the main Bitcoin blockchain can handle less than 10 transactions per second. The network is heavily overloaded. So it is time to represent the problem solution — The Lightning network.
What is Lightning?
The Lightning Network is a secondary layer that covers Bitcoin's blockchain. The protocol enables transactions between parties outside the main blockchain network. Various payment channels between sides or users build up the additional strata.
History of Lightning
The Lightning Network was originally presented in 2015 by Thaddeus Dryja and Joseph Poon. Their concept was connected to the thoughts of Bitcoin’s creator Satoshi Nakamoto. Earlier Nakamoto shared the idea of channels with Mike Hearn, a Bitcoin developer. Hearn revealed the details in 2013. Dryja and Poon worked together to establish Lightning Labs to advance the payment protocol. The company was founded in 2016. However, Lightning Labs presented a beta version of Lightning Network only in 2018.
How does the protocol work?
The payer has to deposit a certain amount of Bitcoin into the network to initiate a payment channel. The receiver then can charge any amount once it has been authorized. In case sides want to use the channel further, they can add Bitcoin at regular intervals of time.
As soon as the system creates a smart contract between the two sides, the rules cannot be adjusted. However, the automatic completion of contracts is also guaranteed by an embedded code. In this way, there is no requirement for a third party to process the transaction. Once a payment channel has been validated, the Lightning Network makes transactions anonymous.
If the two parties agree they will not need to process payments in the future, they can close the channel. The information from the channel is compiled into a single transaction and transferred to the Bitcoin mainnet to keep the record.
Why do we need Lightning?
Those who would use the layer can enjoy low off-chain transaction fees. Another factor to highlight is the process gets faster. And users who stand for an eco-friendly approach when it comes to crypto will be pleased to know that Lightning reduces energy costs associated with Bitcoin’s blockchain. The Lightning payment protocol is not only less energy intensive but can support millions of instant transactions a second. Besides low-cost transactions, the solution revolutionizes the crypto micropayments, making Bitcoin suitable for instant purchases like service subscriptions or gambling.
Lightning in industries
Igambling is the perfect area to integrate Lightning because right now Bitcoin does not process micro-transactions. Gamblers who would like to use the main Bitcoin network face slow and expensive operations. At the same time, players need to pay small amounts constantly.
The Lighting Network will allow users to stake bets using Bitcoin for a lower price. Moreover, the system will support swift payouts for Lighting Network Bitcoin users.
The report for 2021, "Economic Well-Being of U.S. Households in 2021" was published by FED in May 2022. There is a part of the research dedicated to cryptocurrency. The majority of the participants said they used cryptocurrency in 2021 primarily as an investment. 11% of the respondents reported such, and just 3% stated they used crypto as a payment method. As soon as Lightning will fix the scalability issue and present fast transactions, Bitcoin may see wide adoption as a major digital currency for payments.
Most SaaS businesses resort to a subscription-based pricing model. Thus SaaS platforms can bring lifetime value to customers and provide flexibility. Lightning could accelerate the process of integrating and using crypto payments for SaaS subscriptions. It will give SaaS projects opportunities to add payment options for customers, offer lower transaction fees, and attract new users.
The buzz around the Lightning Network is justified by the opportunities it can offer to the community. There are still people who do not have access to financial services as they do not have bank accounts. However, the Lightning Network can provide these people with new standards of payments and include them in the financial system, and businesses that build their services on remittance payments can integrate new alternatives for existing and potential customers.