We Need to Talk About Bitcoin Lightning. Is it a Game Changer?
In this review I will take a look at the current state of the lightning network. I am investigating what progress has been made since the whitepaper in 2016 and I am going to set up my own Lightning node.
The lightning network can be seen as a layer on top of Bitcoin. Also called a ‘layer-2’ solution. This layer solves a number of problems that Bitcoin is currently experiencing. The main problem that the lightning network solves is the speed of transactions. Currently the number of transactions per second (TPS) on the Bitcoin network is between ~3.3 and ~7 TPS. In addition, on average, a new ‘block’ is created every 10 minutes. A credit card network like Visa can process about ~2000 transactions per second, and much more than the ~7 TPS of Bitcoin. To increase the TPS there are several solutions possible, one of which is the lightning network.
The idea behind the lightning network is that it is not necessary to store small, daily transactions on the blockchain. Instead, the lightning network offers a second layer on top of the Bitcoin network.
Although it is a separate layer, transactions are still stored on the Bitcoin network, the blockchain. In order to send transactions via the lightning network, a ‘payment channel’ must first be opened between two users. This transaction is stored on the blockchain. The two users can then send transactions to each other through the lightning network. When they are done sending transactions, they can close this channel again. To close the channel, another transaction is saved on the blockchain. In total you only need two transactions on the blockchain, but you can send unlimited transactions through a payment channel (as long as there is enough Bitcoin).
To make payments via the lightning network you need to open a payment channel with someone else. But suppose you have a payment channel at a restaurant, and a friend of yours also wants to pay money at the same restaurant. Then your friend can use the channel you already have with the restaurant. The lightning network will automatically try to find the fastest route to connect to the network if you don’t have a connection to the payment channel yet. Fortunately, you pay a very small fee (~$0.000102061) to make payments, and to open and close a one-time transaction for the channel.
To see how difficult it is to set up a node that helps the lightning network, I bought a Raspberry Pi (35 euro) and an external hard disk (45 euro). At the moment you can make about $300 a year by hosting such a node and processing payments on the lightning network.
The lightning network is not yet completely stable, so you are in danger of losing your bitcoins. In addition, for example, your hard drive can break down, if you have not made a backup, you can lose everything.
- Make sure you practice on the lightning network ‘testnet’, this is a kind of practice blockchain that you can test for free before you start using real Bitcoins.
The lightning network is growing incredibly fast, and we are working hard to improve it. This layer-2 solution offers great solutions to improve the scalability of the network. To solve all problems Bitcoin will not only rely on layer-2 solutions. But other techniques such as SegWit and ‘Schnorr signatures’ will have to contribute in order to further improve scalability in the long term.
- Transactions are processed much quicker. This reduces the pressure on the Bitcoin network, and ultimately reduces transaction costs for everyone.
- Very low fees for sending transactions. Bitcoin currently has an average fee of ~1$ per transaction. With the lightning network you pay on average ~$0.000102061!
- Users get more control over the network. At the moment the miners have a lot of power in their hands, they use expensive devices to mince. For the lightning network you only need a Raspberry Pi, hard drive and a internet connection.
- Anonymity. Transactions sent on the lightning network are impossible to trace from the outside and cannot be seen on the blockchain.
- Not yet fully stable. There are still some bugs & development is ongoing. It will still take a bit before the network is completely stable.
- The lightning network is still quite complex to set up and use for the regular user. This will have to be improved in the future so that more people can use it. More Bitcoin wallets will need to start supporting the Lightning Network for it to become widely used.
- Limits. You cannot send more Bitcoin than there is in a payment channel. This can sometimes lead to annoying decisions. Do you want your Bitcoin on the lightning network or in your bitcoin wallet?
- It is not possible to send offline transactions, which is possible with Bitcoin.
The lightning network is a great development for Bitcoin. The question remains whether it ultimately meets all requirements and how long it will take before it becomes more accessible for users. If you still have a Raspberry Pi lying around somewhere then I advise you to try to set up a lightning node as well. It is very instructive, and you contribute to the development of the network.
Questions? Remarks? Let me know, I’d love to hear from you.