Bitcoin Lightning Network Will Change Bitcoin Forever
Bitcoin has changed a lot over the years.
When people talk about the history of bitcoin, they usually mention two dates.
The first date is 31 October 2018, when Satoshi Nakamoto published the original Bitcoin white paper. The second is 3 January 2018, when Satoshi Nakamoto mined the first block of the blockchain, thus giving birth to the bitcoin network.
But while those two events are, no doubt, extremely important, the hundreds of less known dates that followed suit are when bitcoin’s success was truly forged. Solutions like SegWit have noticeably increased the Bitcoin transaction speed. Accessible bitcoin wallets and mining clients have made using the crypto intuitive and simple. And countless fixes and security patches have made bitcoin one of the safest ways to transfer money online.
The introduction of the Lightning Network is one of these smaller yet incredibly important dates in the history of bitcoin.
What Is Bitcoin Lightning Network?
Put simply, the Bitcoin Lightning Network is an innovative technology that allows people to make small payments to each other incredibly quickly and cheaply.
This innovation is extremely important for bitcoin. Why? Firstly, it makes using bitcoin for small, day-to-day purchases viable for the first time in the cryptocurrency’s history. While you could, for example, buy a bag of chips with bitcoin, it wouldn’t be a good idea. In addition to having to wait longer at the register for the payment to go through, you’d be hit with a transaction fee that is several times larger than your purchase. I think you can agree this is less than ideal.
Secondly, it greatly helps Bitcoin tackle its scalability problems. The lightning network essentially takes care of the bulk of transaction volume and only leaves the largest transactions to the bitcoin blockchain. Thus, the widespread introduction of lightning will greatly speed up the average transaction speed of both small and large bitcoin purchases.
How Does Lightning Network Work?
At its core, the principle behind the Bitcoin Lightning Network is incredibly simple and it’s based on the knowledge of how most people use their money. In one sentence: It’s a system of individual micro-ledgers. Let us explain.
The main reason Bitcoin is so slow and expensive today is because the blockchain stores a record of every single bitcoin transaction, regardless of how large the transaction sum is or who the recipient is. These small transactions clog up the bitcoin network, leading to longer wait times and higher transaction fees. The Lightning Network solves this problem quickly and efficiently.
Below is the simplest explanation of the Lightning Network on the internet. In it, we’ll take a look at how Lightning Network works via something that’s probably close and dear to you. Your morning cup of coffee.
Let’s say you go to the same coffee shop every morning and buy the same $8 USD cup of coffee. If you were to pay with bitcoin, you’d have to pay a transaction fee every day. While not all that noticeable on their own, those individual transaction fees would add up to over the course of the month. This is what ultimately dissuades people from using bitcoin for small purchases.
What you can do to solve that problem?
Less Terrible: Subscription Model
But what if you would just transfer $240 USD per month to the coffee shop for a coffee-a-day subscription, instead of paying daily?
Your individual purchases would, obviously, happen a lot faster, since you don’t have to pay every single day. Secondly, the transaction fees you’d have to pay per transaction would be around 20 times lower.
Better: Coffee Vouchers
While the subscription model is effective at lowering the average transaction fees, it has one obvious problem. What if you have an unplanned business trip and can’t pick up your coffee for a few mornings? Well, just like with a gym subscription, you pay regardless of how much you actually use. Obviously, that’s less than ideal.
So what if instead of a coffee subscription you’d pay the same $240 USD to the coffee shop in exchange for 30 coffee vouchers?
That would solve the problem of needing to pick up your coffee every day. The fees you’d pay would still be about 20 times lower. Your individual purchases would also happen near-instantly as all you’d have to do would be to give your voucher to be the barista.
Best: Separate Payment Ledger
Coffee Vouchers are a really good option for solving our problem, but there’s still one major downside to them. Commitment. Just like a supermarket gift card, a coffee voucher would essentially tie you to that particular coffee shop. If you decide to go to another coffee shop or quit coffee altogether after your second cup, you’ll be stuck with $224 USD worth of vouchers you’ll never use.
But what if you’d deposit the $240 USD to a separate account that both you and the coffee shop have access to? And what if this account was set up to only transfer funds to the coffee shop either at the end of the month or when you decide to terminate it and withdraw what was left of your money?
Whenever you’d take out a cup of coffee, you’d sign off, giving the coffee shop permission to take 8 USD from that account at the end of the month. The coffee shop cannot take out any cash unless you give them permission, so you don’t need to worry about that. At the same time, the access they do have helps them know they’ll get paid for the coffee that you did buy. Either at the end of the month or when you decide to stop going to the coffee shop, you just terminate the account. When you do so, everyone gets their share of the money.
At its core, this is essentially what the Lightning Network is. It’s a separate ledger system that based on multi-signature wallets with two or more owners. Whenever a purchase happens, money is moved within that multisig wallet, not between your actual wallets. This means that there’s no need to worry about transaction fees. The only time the bitcoin blockchain will be involved is at the very end of your relations with that person or company, when you’ll divide the bitcoin in the multisig wallet.
Why Lightning Network Is Important for Bitcoin?
In one word: scalability.
Scalability had always been a big problem for Bitcoin. Even with SegWit, the amount of transactions the bitcoin blockchain can process is severely limited. While Visa can process a whopping 24,000 transactions per second, Bitcoin can only process 7. This means that, under full load, Visa can process transactions 3,429 times faster than Bitcoin.
Developers have been working on solving this problem for years. One frequently proposed solution is increasing the bitcoin block size. Bitcoin Cash, the most famous Bitcoin hard fork, has famously introduced this change and currently has a block size of 32MB as compared to Bitcoin’s 1MB. But even this radical 32x increase only raised the amount of possible transactions per second to 61. So it’s easy to see that there’s no way Bitcoin can reach Visa’s 24,000 transactions per second by simply increasing its block size as those block sizes would have to be astronomically large.
Lightning solves this problem without touching the blockchain at all. If it is fully implemented and adopted widely – the possibilities of bitcoin will be infinite.
How Can I Use Lightning Network?
The Lightning Network can be used in a multitude of different ways.
The most obvious is the example we mentioned in our explanation: as an efficient way of using bitcoin for small, recurring payments that we already see in the real world today. There’s nothing new that needs to be created where – people are already making these payments. They’re just not using bitcoin to do it. This would include everything from gym memberships and workplace lunches and multiple-visit dental procedures and car rentals.
The second thing Lightning would be ideal for is a business model that’s common online, but which is still foreign to the real world: micropayments. As many of you know microtransactions created a revolution in video games a few years ago. So what’s stopping micropayments for doing the same for the real world? The possibilities are endless. Why buy a whole magazine issue if you only want to read one article? Why buy gigabytes of internet traffic at airports if you could pay by for each megabyte that you actually use? Why rent a car for several hours, if your commute to work will only take 20 minutes?
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