As bitcoin continues to gain acceptance around the world, users and developers are teaming up to find ways to cope with 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 exchange IOUs before their transactions are settled on the blockchain.
Some analysts say the protocols, which were originally envisioned in 2015, represent a watershed moment for the future of cryptocurrencies, as Lightning can exponentially increase bitcoin’s payment processing capacity.
But others fear that this may also lead to increased centralization in the crypto arena, a possibility that goes against the fundamentals 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 capable of high-volume, high-speed transactions.”
Traditional bitcoin transactions are settled once they are compiled into blocks and recorded on the blockchain. This process takes place every 10 minutes, which means that Bitcoin is capable of processing around 600,000 transactions per day. This makes it ideal for payment settlement purposes, but terrible in retail settings.
Lightning seeks to reverse this by making transactions two-way, meaning both participants have to agree to it. Transactions also occur outside of the blockchain, allowing users to refund the general ledger rather than waiting for their transaction to mine.
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 offers 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 considered valid by smart contracts.
Impact of the Lightning Network
Lightning has recently started to gain wide acceptance. According to data from 1ML, Lightning’s network capacity is near an all-time high of 3,300 bitcoins, worth over $ 162 million.
Meanwhile, the number of active nodes, or computers running Lightning software, has grown to over 31,000 from the 12,000 public nodes in the Bitcoin network.
While some investors see the increase in capacity as a warning sign, Andre Neves, chief technology officer at crypto game company Zebedee, told Capital.com that the increase in capacity is a good thing. because “it means that capital is deployed on the network”.
Zebedee provides infrastructure support for Lightning.
Neves notes that the measured capacity is representative of public channel data. There is still a lot of activity in the “unannounced and private channels,” Neves said.
“The network operating at [an all-time high] only means one thing to us – let things go well, ”added Neves.
Stable source of value
Lightning users currently range from companies like Twitter to countries like El Salvador.
What 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 operate the bitcoin blockchain the same way payments are processed in the U.S. Federal Reserve system. Most payments are never seen by the central bank and are processed by third-party processors and commercial banks that use the Fed for final settlement.
Bendiksen said Lightning would make bitcoin just as efficient, the only difference being that Bitcoin would use its blockchain for final settlement rather than a central authority.
Lightning also allows Bitcoin to evolve its payment processing technology horizontally, meaning that Bitcoin can process larger transactions as more payment channels open up. Lightning’s capacity has more than tripled in the past 12 months, according to LookIntoBitcoin. As of December 12, Lightning’s public capacity reached an all-time high of 3,300 bitcoins, up from 1,000 at the start of the year.
The network is becoming so popular that Chainalysis, a global blockchain fraud prevention company, has started monitoring transactions on the network, the company said in a blog post.
According to the company’s research, there were over 90,000 public Lightning channels open as of December 1, down from just 38,000 at the start of 2021. At the same time, just under 3,600 bitcoins worth over $ 205 million is currently stuck in the Lightning Network. , which means that they are used to finance its operation.
But other analysts have pointed out that Lightning has its limits. For example, Tadge Dryja, a researcher at the Massachusetts Institute of Technology, claims that Lightning does not completely solve bitcoin’s transaction fee issues.
Dryja recently told the What Bitcoin Did podcast that these limitations also raise technical questions for miners.
“I think an even trickier question is, let‘Say you have an amazing computer, that there are new discoveries, and computers are a hundred times faster, ”said Dryja. “Does that mean you should say, “okay, yes we will have a huge block size, no real limitations ”because in the long run when the block reward goes away there are a lot of problems that happen when there is no costs “.
Crypto research firm Delphi Digital analyst Ashwath Balakrishnan said in a note that migrating to Lightning is “highly unlikely” to save user transaction fees at this time. But Lightning can still provide long-term benefits.
Balakrishnan also noted that Lightning “definitely plays a role in making bitcoin more accessible and user-friendly for small players who can’t afford a $ 10 transaction fee.”
Read more: What happens after the recent bitcoin price crash?
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