Bitcoin (BTC) changed the world as a decentralized, non-sovereign form of currency that can enable peer-to-peer (P2P) transactions across national borders.
But despite this functionality, Bitcoin’s role as a payment mechanism has been questioned due to its low transaction throughput.
The Bitcoin blockchain can process up to seven transactions per second, meaning that the average transaction fee on the network has hit an all-time high of over $62 during certain periods due to network demand.
To combat low throughput and high transaction fees, developers created the Lightning Network – a layer 2 scaling solution that enables off-chain transactions.
The Lightning Network creates a P2P payment channel between two parties in a transaction. The channel “enables them to send an unlimited number of transactions that are near-instant and inexpensive. It acts as its own little ledger for users to pay for even smaller goods and services like coffee without impacting the Bitcoin network.”
Network users lock in a certain amount of bitcoin to create a channel. Once the BTC is blocked, recipients can charge amounts as needed.
To some extent, the network is seen as a solution to Bitcoin’s scalability problem, but its adoption has been a bit slow. The network currently has 87,000 payment channels and 4,570 BTC worth over $111 million compared to the 19.1 million BTC in circulation whose market cap is over $460 billion.
Despite its slow adoption, the network has the potential to outperform existing payment solutions.
Lightning Network transaction throughput
Payment giants like Visa and Mastercard are used to process payments worldwide. Mastercard’s network is estimated to process up to 5,000 transactions per second, far exceeding Bitcoin’s seven per second.
Visa’s transaction throughput is even more impressive, capable of processing up to 24,000 transactions per second. In a recent interview, Vasant Prabhu, Visa’s chief financial officer, said the network could theoretically process up to 65,000 transactions per second.
However, the Lightning Network goes much further, processing up to 1 million transactions per second, making it the most efficient payment system in the world in terms of transaction throughput.
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Bitcoin #Lightning Payments vs Contactless #Fiat Payments at #Gibraltar Bakery.
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Cointelegraph reporter Joseph Hall conducts an impromptu test of the Lightning Network versus contactless fiat payments.
Speaking to Cointelegraph, Ovidiu Chirodea, CEO of Romanian cryptocurrency exchange Coinzix, noted that the network marks the next phase in the evolution of money. First, per Chirodea, was gold, which was a store of value but not a convenient medium of exchange, followed by fiat currency as a convenient medium of exchange.
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Bitcoin, Chirodea said, was an evolutionary step that created a new store of value, using the Lightning Network as a platform to also become a medium of exchange:
“Visa charges companies around 3% to process payments, so I think the Lighting Network is a game changer. Businesses will increase their revenue by using it and that is something you cannot ignore.”
However, he noted that the network’s scalability is “not that great” as users have to open a channel with each party and lock BTC on it, affecting their liquidity. In his words, tying up liquidity can be avoided by “using other ways and other payment channels”, but the solution “is not very scalable as payment channels keep opening and closing”.
Thomas Perfumo, head of business operations and strategy at crypto exchange Kraken, told Cointelegraph that since introducing Lightning Network support in April 2022, the company has “continuously increased” network capacity, making it the fifth-largest node on top the Lightning is network:
“We currently have over 800 open channels that can facilitate over 18 billion satoshis worth of payments. Customers routinely fund their accounts through the Lightning Network every day.”
Perfumo added that the exchange sees the Lightning Network as “essential in creating a permissionless payments system that will ultimately help accelerate cryptocurrency adoption globally.”
While the Lightning Network’s benefits in terms of transaction throughput are now clear, it does have some notable downsides.
First, opening a Lightning wallet and funding it may not be as easy or as ingrained as opening a bank account and using a debit card.
Additionally, funding a Lightning Network wallet requires users to send BTC from a traditional Bitcoin wallet, and creating a payment channel involves locking funds.
Once funds are blocked in a payment channel, they can freely transact, but the funds cannot be recovered until that channel is closed. Additionally, offline transaction fraud is possible as one party can shut down a channel when the other is offline in an attempt to steal funds. While third-party services can mitigate risk, they deter some from invading the network.
Privacy, usability and censorship resistance
Considering these downsides, Max Rothman, head of crypto and digital assets at global payments processor Checkout.com, told Cointelegraph that the ability to use cryptocurrencies to exchange goods and services “is only effective when crypto seamlessly switches hands can”.
The Lightning Network, which is peer-to-peer, Rothman added, places responsibility for the transaction process on both merchants and customers. At an institutional level, “without a trusted partner to manage thousands or millions of cross-currency transactions, internal management can be challenging and resource-intensive.”
Rothman said that solutions like Checkout.com, which rely on partner companies like Visa to offer on-ramps that enable crypto-to-fiat conversions, are that “bridge that offers a more seamless translation experience between Web2 and Web3.” .”
Onboarding the next million or billion people to crypto “requires guidance, support and tailored solutions that fit all payment needs and take into account the current payments environment in which we operate,” he explained.
Speaking to Cointelegraph, Bitcoin Foundation board member and New Hampshire U.S. Senate nominee Bruce Fenton said the Lightning Network “allows Bitcoin to conduct more transactions” while “being more decentralized and censorship-resistant than centralized corporations or most others.” chains.”
When asked about the pros and cons of using the Lightning Network versus solutions from companies like Visa, Fenton dismissed Visa as “fully centralized,” meaning it could be “stopped or censored.” While centralization might be an issue on the Lightning Network for some, he said it doesn’t affect the Bitcoin blockchain itself, adding:
“It’s mainly about building on and for what money. For those who believe in Bitcoin as the superior money, LN is the most well-known scaling solution.”
Chad Barraford, technical lead at THORChain decentralized liquidity protocol, told Cointelegraph that the Lightning Network allows for a “cash” option when checking out online stores with “no other party participating, no exorbitant fees, and significant privacy benefits.”
He said that the network “is not solely motivated by the best interests of shareholders or board members” but serves the interests of its participants as a public good, adding:
“Visa is a financial institution with an inherent desire for profit and control, acting on behalf of governments. The Lightning Network is a pure public good. It only exists to provide a basic and critical service to every person on the planet who needs access to financial services.”
The launch and success of the Lightning Network is “tightly coupled to the Bitcoin network itself,” Barraford explained. He believes that inflationary pressures “will drive more and more people to the Lightning Network” as the world views BTC less as a speculative asset and more “as a currency to buy items.”
While the comparison to networks like that of Visa or Mastercard is clear from these answers, it should be noted that some of these arguments apply to other solutions like PayPal, which may, for example, be forced to freeze customers’ assets or charge higher fees.
Blockchain technology has evolved over time to the point where other blockchains can compete with Visa’s transaction throughput without wanting to benefit.
What about other chains?
Speaking to Cointelegraph, Fenton hinted that the Lightning Network is proving to be “more decentralized and censorship-resistant” than most other blockchains.
Decred co-founder and project lead Jake Yocom-Piatt built on this idea, telling Cointelegraph that other blockchains are unable to match the qualities of the Lightning Network.
Yocom-Piatt claimed that the high-throughput Solana blockchain, with a theoretical throughput of 710,000 transactions per second, is a “centralized, no-custodial blockchain whose validation nodes must run in data centers on high-end hardware.” Comparing the Lightning Network, Solana, and Decred himself, he said:
“Of these three, Lightning Network is the most decentralized, sovereign, and most aligned with the native ethos of the cryptocurrency space. Solana sacrifices most of its decentralization through its onerous validator node requirements, but at least it doesn’t seem able to arbitrarily censor users and merchants.”
Whatever the future holds, it is clear that innovations in the cryptocurrency space will increase transaction throughput. Whether users will ultimately choose to sacrifice privacy and immutability for convenience remains to be seen.
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As it stands, more convenient solutions are available. It’s now easier to use Layer 1 blockchains for payments through centralized entities that allow crypto assets to be converted into fiat currencies at the point of sale.
For the Lightning Network to reach a wider audience, more services will likely need to support it. Leading exchanges like Coinbase, Binance, and FTX have not followed in the footsteps of other exchanges in taking over the network and have hampered its growth. As the network relies on having more payment channels to route transactions, other networks and centralized payment providers will likely come out on top.
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