There’s no secret that Bitcoin suffers from slow and expensive transactions. In December 2017, an average transaction fee was over $30 and a confirmation process was taking about 30 minutes! Now the numbers are much lower, but scalability remains the biggest issue Bitcoin has yet to solve.
Many crypto enthusiasts believe that the Lightning Network will bring new solutions that will affect a lot of currencies. It is an off-chain technology, which can significantly decrease both the speed and the price of BTC transaction. However, some claim that it will be not Bitcoin but Litecoin benefiting most from its launch. In addition to fast and cheap transactions, the technology introduces so-called ‘atomic swaps’ that allow for cross-chain cryptocurrency exchange. As Bitcoin and Litecoin are among the first to utilize the LN upgrade, the level of interoperability between the two coins will increase. In layman’s terms, with the Lightning Network implementation, the number of ways to exchange Litecoin for Bitcoin and vice versa will increase. Let’s say, if a BTC holder wants to use a cheaper LTC for daily micro-payments, they do not need to go for a crypto exchange to buy Litecoin first; they can simply perform an atomic swap between two blockchains. Seems catchy, doesn’t it? Let’s go deeper into how the Lightning Network works and how it will change the balance of power in the crypto market.
What is the Lightning Network?
The Lightning Network is an off-chain system of payment channels powered by smart contracts and designed to facilitate direct deals between users. It can work on Bitcoin’s blockchain or any other, and be used to exchange different coins cross-chain owing to the Atomic Swaps technology. The Lightning Network wallet address is accessible to two users who want to make a deal – they input the number of coins to be spent and confirm the transaction. The contract will be finalized only when both parties sign it. At any time, any user may close their unique channel, so the latest information about transactions and balances will be sent to Bitcoin’s blockchain.
What does this mean for regular crypto investors? Using the Lightning Network, they can make deals without synchronizing with blockchain all the time. Data about transactions will be transferred via off-chain payment channels.
How will it affect Bitcoin?
The Lightning Network was designed to make payments more convenient and attract more users. This system may be completely game-changing for Bitcoin. For now, most users consider BTC as a store of value but not as a payment method because of the high fees and slow processing times. With the Lightning Network, Bitcoin will be able to become cheaper and more efficient, which is going to be a clear competitive edge over some altcoins.
Bitcoin’s blockchain is based on the Proof-of-Work algorithm. It means that miners confirm on-chain transactions. They can decide in which order to verify deals and will obviously choose ones with higher fees first.
How the Lightning Network can help here? It eliminates miners’ verification step and increases the speed of transactions’ processing. Off-chain deals will be done instantly.
Bitcoin – the current price of which is over $6,400 – can be divided into smaller parts called Satoshis. One such unit is equivalent to 0.00000001 BTC. As you can see, a lot of Satoshis are needed to form even the tiniest sum in cents.
At the moment, the fees are too high which makes small deals inefficient. Say, an average fee of $0.2 makes purchasing coffee or paying for a subway ticket with BTC unreasonable. In contrast, Litecoin offers $0.04 fees, which makes it a perfect cryptocurrency for micro-payments.
Implementation of the Lightning Network can result in reducing fees and making micro-payments with Bitcoin more realistic. All transactions will be based on smart contracts, and the system itself will control the processes.
Behind its intention to solve the fees problem, there are some controversial features in the Lightning Network. It has its own fees for opening and closing a payment channel and for transferring assets between channels. At the moment, the latter fee is zero, but the situation can change.
Also, the Lightning Network usage can result in making more on-chain transactions if your wallet fails to find a route to the receiver. In this case, a user will have to make two transactions of opening and closing a channel in order to meet a payment eventually.