Bitcoin rose to fame as the first of its kind, the pioneering cryptocurrency that paved the way for others to come. Since then, however, the rest have more than caught up. There are currently several cryptocurrencies that are faster, cheaper and more private, and the world is responding by moving their money to these more efficient networks.
The Trouble with Bitcoin
Earlier in 2017, SatoshiPay announced that it would no longer be using the Bitcoin blockchain for payment processing, and would be adopting Stellar as its replacement partner. Quicker payments and lower transaction fees, as well as a “mature” and “stable” software ecosystem, were stated as reasons.
A few months down the line, in December 2017, the popular gaming store, Steam, announced that it would also be stepping away from Bitcoin as an accepted payment method. Once again, the gaming platform complained of “high fees and volatility in the value of Bitcoin.”
This move was closely followed by the co-founder of none other than Bitcoin.com, Emil Oldenburg, publicly urging investors to sell their Bitcoin for Bitcoin cash. His reason? Bitcoin’s slow transaction speeds coupled with its ever-increasing transaction fees.
In addition, Bitcoin has not had a good last few weeks, losing more than 20 percent of its value on Christmas Eve and struggling to stay above $14,000. The price of Bitcoin at the time of writing has dropped as low as $13,000. At this stage, it does not appear to be returning to that record $20,000 mark anytime soon. But there seems to be an all-encompassing solution on the horizon.
What is the Lightning Network?
The lightning network is not a new cryptocurrency or a new blockchain. It is merely a method through which Bitcoin transaction speeds can be dramatically increased, while simultaneously reducing processing fees and increasing the amount of privacy in each transaction.
At this point, Bitcoin has one of the slowest processing speeds amongst all forms of online payment methods currently available. While Visa can scale up to 65,000 transactions per second, Bitcoin is capable of a mere seven.
As an illustration of this problem, Amazon is recorded to have hit up to 600 transactions per second during its peak times, making Bitcoin a poor payment partner for the e-commerce giant.
The lightning network changes all of this, giving Bitcoin the ability to scale up to billions of transactions per day, and once again making its service offering competitive amongst its peers.
How does the Lightning Network Work?
The lightning network uses off-chain technology, which, simply put, means that not every transaction is recorded on the blockchain. This process cuts out the processing times as well as the fees paid to the Bitcoin miners who validate the transaction.
Instead of the blockchain, the system comprises of a parallel-running platform which is opened between two parties who engage in frequent Bitcoin transactions. In a similar method to escrow, the buyer deposits an amount in the “holding account,” and then releases a portion of it to the seller at each point of purchase.
For example, if Steven buys a bagel from the corner café several times a month during his lunch break, he and the merchant can open a secure and individual Bitcoin payment channel through the lightning network.
Should the verbal agreement between the two parties come to an end, either party can terminate the payment channel at any time, at which point, any remaining funds held in the channel are returned to the respective owners.
A separate balance sheet records the transactions in the lightning network which then gets stored within the individual payment channel. These translations are only recorded on the blockchain on two occasions – when the payment terminal is opened, and when it is closed.
At the time of termination, the latest form of the balance sheet is sent to the blockchain and its authenticity validated by miners. As the entire process is automated, there can be no theft of funds or hidden transactions.
Additionally, all transactions made within the private payment channel are not publicly broadcasted on the blockchain, which allows for private transacting.
When will the Lightning Network be Implemented?
Though the lightning network is not live outright, it is currently undergoing testing on the Bitcoin testnet, and is estimated to be formally introduced in early 2018.
Q: When will the Lightning Network be rolled out?
A: The rollout has already begun. This is an iterative distributed learning process; it’s unlikely there will be a single point in time at which we say LN is “deployed” because it will grow organically. Software is never finished.
— Jameson Lopp (@lopp) January 1, 2018
Not only will it solve the problems that Bitcoin has been facing, but it will once again revolutionize the execution of cryptocurrency transactions.