Make Bitcoin Great Again
Bitcoin is great as it is but it can be better especially on the payments side of things, as we know the bitcoin network has had issues dealing with the transaction throughput which was evident in the 2017 bull cycle. Whenever there is a huge demand for transactions on the bitcoin network the price automatically shoots up (even as high as $60).
The confirmation time is another issue where bitcoin could do better, it takes at least an hour to get 6 confirmations on the Blockchain which can be a long period of time especially when someone is spending their bitcoins. This does not make sense when it comes to payments as a person paying for a cup of coffee and a person sending millions of dollars are essentially utilizing the same amount of security on the network.
This is not just unique to bitcoin but for most Blockchains, there is some tradeoff that comes when you try to scale a Blockchain protocol. So the way forward would be to use the Blockchain only for final settlement and do the rest of the computing/throughput on other layers.
There is no magic wand but there is still lightning
When it comes to technology there is no one solution to all problems, things get better over time as multiple incremental improvements take place. This is especially true to Blockchains, while lightning is not an end all be all solution to all of bitcoins woes it is definitely a significant improvement over the protocol (probably the most important).
So what is lightning network?
Lightning, as the name implies is a scalability technology intended to enable the bitcoin network to process millions of transactions per second (theoretically). Instead of pushing all the transactions on the main network, lightning acts as a layer 2 solution over bitcoin to facilitate transactions among peers.
By moving settlements off the bitcoin blockchain, we are able to create a network of payment channels where peers send payment packets (Hashed Time-Locked Contracts) over a decentralized network and the software routes this packet correctly to the destination peer. These payment packets or HTLC’s are special in that they impose conditions that the underlying bitcoin blockchain can reinforce.
Think of it as a court system, the bitcoin blockchain is the most secure and has the last say (kind of like the supreme court) and the lightning nodes are like the local authorities with checks and balances. This means that if any person on this network tries to attempt to cheat the system by stealing a payment or not playing by the rules, the bitcoin blockchain would punish this participant by allocating all the funds that this participant put in to be a part of the network, to the peer.
This is what makes the network trustless and decentralized by allowing any bitcoin holder to run a lightning node and be a participant in the network, irrespective of whether they wish to lock funds in channels or not. Today, routing nodes earn a few satoshis per transaction, i.e. a small incentive for passing on packets to the next node in the network, until it is relayed to the destination node.
Why is this important? Bitcoin was created as a peer to peer electronic cash system – meaning, a method where two parties can exchange value electronically, with no middlemen involved. But today, practically, if a bitcoin user was to use his peer to peer electronic cash as a mode of retail payment, it would simply be infeasible because of the latency behind processing a bitcoin transaction, i.e. having it included in a block.
How will the lightning network help Bitcoin?
1. Faster Transactions – Lightning enables users to make instant bitcoin transactions, as there is no need to wait for confirmations the settlement is almost instant.
This has wide potential, one of the main reasons bitcoin has not taken off as a payment rail is because of longer settlement time. The longer you wait the higher the risk is that you are exposed to the price fluctuations of bitcoin when you are converting fiat to BTC or vice-versa. Since lightning can enable almost instantaneous settlements the bitcoin network can be used as a payment rail for cross border payments, online purchases, e-commerce, and other use cases.
2. Increased Privacy – One of the more sophisticated criticisms of bitcoin is its lack of complete privacy. Unlike hard cash, Bitcoin is pseudonymous, the full transaction of an address is visible along with the balances. With sufficient knowledge and tools, it is possible to track down the ownership of bitcoin addresses (which has been done several times by law enforcement).
Although there are pros and cons to public Blockchains, private transactions are without a doubt a need of the markets. The existence of private Cryptocurrencies like Monero and Zcash is an attestation to this fact. The use of lightning network will make bitcoins transactions more private since they are off-chain for the most part. Lightning greatly increases the privacy of bitcoin if used correctly.
3. Microtransactions – With lightning network users can send as low as 0.00000001 Bitcoin without custodial risk, this is impossible to do in the current bitcoin network as fees paid will be much higher than the transaction amount itself.
Check out this twitter thread on bitcoin micropayments:
1/ Fantastic thread from @brian_armstrong that got me thinking a lot about the relationship between dollars, cents, and sats and the consumer value proposition of Bitcoin micropayments enabled by the Lightning Network https://t.co/F8iWZuvc2D
— Cuy Sheffield (@cuysheffield) February 16, 2020
Here are some of the interesting applications of micropayments:
- Streaming money – Instead of sending a single payment, money can be streamed like songs on Spotify using the lightning network. Streaming has tremendous value in various use cases like subscriptions, freelancing, renting among many more.
- Micro trades – Lightning Network can be used to facilitate micro-trades (as opposed to making micro-payments for daily transactions) between different crypto exchanges by customers. In this case, customers could conduct trades on well-known exchanges, such as Coinbase and Kraken, using accounts equipped with LN technology
- In-game payments – This is the most interesting application of micropayments, take for example satoshis place – with as low as one satoshi you can draw a pixel on a public board. It captured the imagination of many users and proved out to be a popular application of lightning.
4. Businesses to accept payment – Lightning network is a boon for businesses that accept payment on a frequent basis as it is a much cheaper option than the alternatives (Businesses today pay 2-5% on each transaction to payment processing networks to accept fiat money). Bitcoin could also bridge the gap for businesses that have problems with the banking system like the cannabis and adult industry.
The practical implications of lightning are that now any participant on the bitcoin network can additionally run a piece of software on top of their existing bitcoin node, to either be able to make instant payments or route payments for other peers. This opens up a massive new type of payment use case that was previously impossible with traditional payments.
This means that for the first time in the history of electronic money, two individuals can exchange value instantly, with zero middlemen, negligible fees and a high degree of privacy.
The only way to understand what lightning means to Bitcoin is by trying it!
Check out our lightning wallet HERE. (The app is now available for download on Android and iOS, with free, pre-loaded test bitcoin. Coinbase integration and mainnet release are soon to come.)