Bitcoin Lightning: Why You Need to Know About It!

LeoFinance
7 Min Read
1388 Words

Bitcoin has been on quite a roll recently; maintaining a price of around $60,000. Already a 3x from the all-time high of the previous bull market in 2017. Most bitcoin experts are predicting that bitcoin has a lot of energy left in the tank to go much, much further. While just a year ago a price prediction of over $100,000 would have been thought to be too wild. Now we are seeing price predictions ranging from $300,000 to even over $1 million. It is definitely an exciting time to be in the bitcoin market; but most of us all have the same regret. We wish we had even more BTC.

While we have been seeing a lot of price predictions, there has also been a lot of talk about the future of the bitcoin blockchain and what its role will be in the world. Most people can agree that bitcoin has a very good chance to replace gold as a great store of value. While others think that bitcoin has even more potential to eventually replace the US dollar and become the world reserve currency. The thought of that possibly happening is incredibly exciting and would make a lot of us very rich.

A lot of people tend to give bitcoin a lot of flack; saying that there is next to zero development happening on the chain, and that the 2nd layers such as Lightning, haven't made any traction up until this point. While of course those layers haven't hit off with great popularity yet; there are a lot of great developments happening here that is highly underrated. These developments have the potential to change bitcoin from just a store of value type asset, into something much more. A lot of people don't even know about Lightning, so let's take a look at what it is, and what it could mean for bitcoin. It could change everything.

What is Bitcoin Lightning??

Bitcoin Lightning is simply a layer-2 network that is built on top of bitcoin. It allows transactions to happen off-chain very fast and also cheaply. But for someone new to bitcoin; the terms layer-2 and off-chain can sound very intimidating and confusing. I find it very helpful to think of it like this. The main bitcoin blockchain is like your favorite highway that you need to take from point A to point B. But, every time you want to use that highway there is an extreme amount of traffic that is making you lose time and money. So while starting on the main highway, you then take an exit to a side road to bypass all of that heavy traffic. And once you have bypassed all of that traffic you turn back onto that highway just in time to reach the destination. This allows transactions to be nearly instant and insanely cheap; usually costing just 1 sat. Very simply this is what Lightning is doing.

Scalability and Cost

One of the main complaints of Bitcoin is how slow the transactions are and how much they cost. While it is still much faster than anything done in the banking industry. But, as you can see in the picture; payment services such as Visa and PayPal are much faster. Visa being able to achieve 24,000 TPS. If bitcoin is to ever evolve more into a payment service for everyday transactions, then this will need to increase. This is where lightning comes into place. Lightning overs the ability to do millions of transactions per second; blowing Visa out of the water. Not only is it faster, but it much cheaper as well. As I mentioned above, at the moment transactions only cost 1 sat. Which is a fraction of a penny. While transactions using Visa often cost retailers 2-3% or more. If you were a retailer it would be a no-brainer to use something cheaper and faster than Visa. Also something that would be another benefit as a retailer is that there is no ability for charge-backs with Lightning. This means that once funds are received; the transaction has been settled and you can have relief that no one will try to try to perform a charge-back.

How does it work?

The Lightning Network is made up of channels that make instant transactions possible between system participants using bitcoin. The idea behind Lightning is that that not every transaction needs to be registered on the blockchain. Instead, only the channel creation and exit transactions are reported on chain; all other transactions are recorded in the Lightning Network.
An example of this is if two users want to transfer money to each other on a regular basis, they can create a channel by adding funds to a multisig wallet. They will then use these funds to carry out an infinite number of transactions. Recently Kraken and OKCoin have been integrating Lightning into their exchange. This would allow bitcoin transactions from exchanges to be nearly free. A big change for bitcoin.

Off-chain transactions are transactions that are registered using a form of digital ledger that is secured by a time clock. After each transaction, all parties digitally sign and upgrade their versions – most commonly by scanning a QR code. The actual redistribution of the original funds in the wallet occurs only when the channel is locked, depending on the final balance sheet, on the blockchain.

Pros

Instant payments. Insanely fast and cheap payments. Finally using bitcoin to buy coffee has become viable; even though I would recommend you to HODL instead.
While Bitcoin transactions can become quite expensive during peak usage times. Using the Lightning network will cost around only one Satoshi, equalling to be less than a fraction of one cent.
It can be used for extremely small payments, even micropayments. The minimum payment is 0.00000001 BTC, or one Satoshi. This makes it incredibly viable to use it for everyday transactions.

Cons

Since Lightning first launched in 2018, so the technology the adoption has been low, and development hasn't been at the speed that many users have hoped for.
Using Lightning requires you to open a channel and that requires BTC to both open and close the channel.
Transactions can only be performed when both people involved are online. This means that you can't just send anytime you want to. Admittedly a lot of work needs to be done here to improve the user experience.

Development Happening

For a long time development with Lightning had been very quiet and it had people worried that the project was already forgotten and already dead. But during the last few months there have been great strides and adoption is heavily picking up. We have seen a few large exchanges officially announce that they are going to integrate the Lightning network. These exchanges were Kraken and OKCoin. I fully expect more exchanges to soon follow as well. Then we have new exciting startups using the Lightning network as well. Strike; a worldwide remittance app is looking very promising and could quickly leave rivals such as Western Union, Wise (previously named TransferWise, and others in the dust. Another early project that I am interested in is Sphinx Chat; a Lightning service that allows you to chat using the lightning network and also use it to pay and support your favorite content creator. As bitcoin grows in price and popularity; there will be even more development that begins to take place. People follow the money.

As you can see; I am very excited about the potential that Lightning has to bring to Bitcoin. A lot of people are even aware that it exists, or that development has recently been picking up quite nicely. Great development does take time, and hopefully that is what will happen in this situation. While admittedly, there are still challenges that need to be ironed out before Lightning possibly has the potential to take bitcoin to the next level. Helping to make it not only a great store of value, but also viable to use for everyday transactions. I am very bullish.

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How about you? What do you think about Bitcoin Lightning? What needs to happen for it to see more development? Could it make bitcoin the only coin that you need to have?

As always, thank you for reading!

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