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Lightning Network aims for cheaper, more stable bitcoin

By Robert Davis

15:51, 17 December 2021

Man holding bitcoin gold coin in front of lightning
Lightning has just recently begun to gain widespread acceptance - Photo: Shutterstock

As bitcoin continues to gain acceptance across the globe, users and developers are teaming up to find ways to address its high transaction fees and make the asset a stable source of value.

Enter the Lightning Network, a second-layer protocol that essentially allows users to trade IOUs back-and-forth before their transactions are settled on the blockchain.

Some analysts say the protocols, which were originally envisioned back in 2015, represent a game changing moment for the future of cryptocurrencies because Lightning can exponentially scale bitcoin’s payment processing capacity.

But others worry that it could also lead to increased centralisation in the crypto realm, a possibility that cuts against the foundations of the technology.

What is Lightning Network?

According to its white paper, Lightning uses its native smart contract language to create “a secure network of participants which are able to transact at high volume and high speed”.

Traditional bitcoin transactions are settled once they are compiled into blocks and recorded on the blockchain. This process takes place once every 10 minutes, which means bitcoin is capable of processing approximately 600,000 transactions per day. This makes it great for payment settlement purposes but terrible in retail settings.

Lightning seeks to upend that by making transactions bidirectional, meaning both participants must agree to it. The transactions also occur off the blockchain, thereby allowing users to refund the ledger rather than waiting for their transaction to be mined.

The network is also cross-chain compatible so that transactions can be made between different blockchains without the use of an intermediary if the chains have similar cryptographic hash functions.

It also provides the same protection for transactions that on-chain transactions receive. Lightning users can cancel their orders at any time, and only the most recent orders are deemed valid by the smart contracts.

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Lightning Network impact

Lightning has just recently begun to gain widespread acceptance. According to data from 1ML, Lightning’s network capacity is hovering near an all-time high of 3,300 bitcoin, a value of more than $162m.

Meanwhile, the number of active nodes, or computers running the Lightning software, has increased to more than 31,000 compared with the 12,000 public nodes in bitcoin’s network.

While some investors see increased capacity as a warning sign, André Neves, the chief technology officer at crypto gaming company Zebedee, told that the heightened capacity is a good thing because “it means capital is being deployed to the network”.

Zebedee provides some infrastructure support for Lightning.

Neves notes that the capacity being measured is representative of the data in public channels. There is still a great deal of activity in “unannounced and private channels,” Neves said.


0.54 Price
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Long position overnight fee -0.0753%
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Overnight fee time 21:00 (UTC)
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“The network running at [an all-time high] only means one thing for us  that things are going well,” Neves added.

Stable source of value

Lightning users currently range from corporations like Twitter to nations such as El Salvador.

What the users have in common is that they need bitcoin to become a more stable source of value. Analysts like Christopher Bendiksen at CoinShares argue that Lightning is designed to do just that.

For starters, Bendiksen said in a note to investors that the Lightning Network will make bitcoin’s blockchain operate similar to how payments are processed in the US Federal Reserve system. Most payments are never seen by the central bank and are handled by third-party processors and commercial banks who use the Fed for final settlement purposes.

Bendiksen said Lightning would make bitcoin similarly efficient, with the only difference being that Bitcoin would use its blockchain for final settlement rather than a central authority.

Payment processing

Lightning also allows bitcoin to scale its payment processing technology horizontally, meaning bitcoin can process larger transactions as more payment channels open up. Lightning’s capacity has more-than tripled over the last 12 months, according to LookIntoBitcoin. As of 12 December, the public Lightning capacity reached an all-time high of 3,300 bitcoin, up from 1,000 at the beginning of the year.

The network is becoming so popular that Chainalysis, a global blockchain fraud prevention firm, has begun monitoring transactions on the network, the company said in a blog post.

According to the company’s research, there are more than 90,000 open public Lightning channels as of 1 December compared with just 38,000 at the beginning of 2021. At the same time, just under 3,600 bitcoins worth more than $205m are currently locked in the Lightning Network, meaning they are being used to fund its operation.

Lightning challenges

But other analysts have pointed out that Lightning has its limitations. For example, Tadge Dryja, a research scientist at the Massachusetts Institute of Technology, argues that Lightning does not completely solve bitcoin’s transaction fee issues.

Dryja recently told the podcast What Bitcoin Did that these limitations also raise some technical questions for miners.

I think an even trickier question is, lets say you have an amazing computer, there is some new discovery and computers are a hundred times faster,” Dryja said. “Does that mean that you should say, okay, yeah we will have huge block size, no real limitations”, because long term, when the block reward disappears, there are a lot of problems that happen when there are no fees”.

Analyst Ashwath Balakrishnan at crypto research firm Delphi Digital said in a note that it is “highly unlikely” that migrating to Lightning will save users transaction fees right now. But Lightning can still deliver some long-term benefits.

Balakrishnan also noted that Lightning is “definitely (playing) a role in making bitcoin more accessible and friendly to smaller players who cannot pay $10 in transaction fees”.

Read more: What comes next after the recent bitcoin price crash?

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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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