When Satoshi Nakamoto launched Bitcoin, he envisioned a peer-to-peer payment system that would simplify banking. He envisioned a system that would restore privacy and free third parties. By doing this, transactions will be faster, cheaper and more efficient While this vision has yet to materialize, the Bitcoin Lightning Network aims to bring us even closer.
For all the functional benefits that Bitcoin offers, using it in real time is still quite complicated. In 2016, Joseph Poon and Thaddeus Dryja launched the Lightning Network to try to make things smoother and more affordable. How have their ideas performed?
Aim of the Lightning Network
The Lightning Network is a second layer scaling solution built on top of the Bitcoin blockchain. This allows transactions to be processed almost instantly and with much lower transaction fees than traditional payment networks like Visa and MasterCard. Using a technique called onion routing, the protocol essentially splits data into multiple packets. Then, it sends them through different nodes in the network using end-to-end encryption. This makes transactions more secure and private as it is difficult to trace the origin of a transaction.
The Bitcoin Lightning Network allows for increased scalability with the ability to handle millions of transactions per second and much higher transaction volumes than Visa or MasterCard. Because it eliminates the need for a centralized system, providing a decentralized peer-to-peer system with no single failure. Additionally, Lightning Network fees are much lower than Visa and MasterCard, making it a great option for microtransactions.
Microtransactions are small, instant financial transactions that take place online. They usually involve the exchange of just a few cents or dollars and can be used to purchase digital goods or services. Using small amounts of Bitcoin is impractical due to high gas fees. The Lightning Network is an ideal platform for microtransactions due to low transaction fees and near-instant processing.
Credit Card Fees vs. Bitcoin Lightning Network
Credit cards come with fees, some of which make sense, while others may surprise you. As noted in Forbes, credit card companies charge a range of processing fees to merchants for accepting your payment method. These fees range from card type to merchant type to transaction amount to transaction location. Some fees are based on monthly sales, others are based on per transaction.
Visa charges an interchange fee of 1.15% + $0.05 to 2.40% + $0.10. Additionally, they charge a 0.14% valuation fee.
MasterCard charges interchange fees ranging from 1.15% + $0.05 to 2.50% + $0.10. Their surcharge fee is 0.1375% for transactions under $1,000 and 0.01% for transactions of $1,000 or more.
So a $100 purchase using Visa costs the merchant $1.34 to $2.64. The same purchase using MasterCard ranges from $1.4775 to $2.7375.
The Bitcoin Lightning Network charges a base fee of 1 satoshi (or 0.00000001 BTC), which is roughly $0.02 as of this writing. For some, this may make accepting payment methods built into the Lightning Network, such as Strike, more attractive.
Centralization vs. Decentralization
Credit cards can take a few days to process payments, which is why you may see “pending” transactions on your statement. This can be extremely stressful for individuals and businesses operating on limited funds.
Centralized banking takes days to verify transactions on behalf of payers and payees. Decentralized banking enabled by the Lightning Network can take seconds. In addition, you can use the network without sharing the personal information required by the bank.
However, if users make a mistake and send funds to the wrong person or get hacked, there is no central authority to take action. A major advantage of using credit cards is that purchases made with scam and stolen cards can be reversed. The same crime cannot be committed with crypto wallets.
Challenges and Limitations of the Bitcoin Lightning Network
Using and scaling Bitcoin’s Lightning network presents a number of technical, regulatory, and security considerations.
The most serious challenge associated with Lightning Networks is its complexity. Users need to have a deep knowledge of cryptography, networking protocols and digital asset management to use the network effectively. In addition, the deployment of nodes and channels requires a high level of technical expertise. This makes it much more likely that people will give up and look for a more user-friendly offering.
In terms of security, Lightning networks are particularly vulnerable to attacks, such as Sybil attacks and DDos. A single node or channel can be targeted by attackers and taken down with relative ease, putting the entire network at risk. This makes it especially important for users to set up their nodes and channels correctly to ensure the security of their network.
Finally, there are several regulatory challenges associated with using the Bitcoin Lightning Network. Different countries have different laws and regulations around digital assets. This makes it difficult to navigate the legal implications of using this technology. Many jurisdictions still do not recognize cryptographically signed messages as a valid form of payment. Therefore all the proposed benefits can be rendered null.
David Marcus recently launched LightSpark, and on Tuesday he released its suite of tools. The company enables users to integrate its platform into their operations. This will allow them to process Bitcoin transactions quickly and easily on the Lightning network. Most importantly, they emphasize the high technical literacy required to access the benefits of the Lightning Network.
In Brazil, Bitcoin Beach has onboarded hundreds of people, including merchants and consumers. Vendors can purchase handheld payment card readers or point of sale machines. And shoppers can use the Bolt Card, which works like a debit card that holds crypto. By simulating a familiar mode of payment, they make it easier for people to choose.
Nordlys, a pseudonymous Lightning node operator, said in recent tweets that these are exciting times for developers looking to build things on the Lightning Network. But they also worry that the constant shift in liquidity could have a negative impact on the network, including failed payments.
Although far from perfect, the Lightning Network offers several advantages for digital payments. It is encouraging to see many entrepreneurs tackling this technological hurdle. To be fair, the Lightning Network may not be the protocol that brings Bitcoin to the masses. But it helped lay the groundwork for others to address the need for a payment system convenient for merchants and consumers.
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