Bitcoin’s Lighting Network

The High-Speed Layer Will Be a Game-Changer

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Scalability is one of the major issues facing cryptocurrencies today. This issue will continue to grow as adoption grows. As a recent Cambridge University study notes, “The increase in interest [in crypto]– and subsequent usage — brought into the foreground limitations of base layer scaling and led to the launch of so-called “layer-2 solutions”, such as the eagerly-awaited Lightning Network on Bitcoin.”

Origins of Lightning

In 2015, Joseph Poon and Thaddeus Dryja set out their vision for the Lightning Network in a white paper. Three teams: Blockstream, Lightning Labs, and ACINQ are now working on developing the network. If the network can successfully address scalability issues, it’s likely other currencies could aim to emulate it. Ethereum, for example is in need of a scaling solution.

Faster Transaction Speeds

The Lighting Network is Bitcoin’s answer to the scalability issue. As Cointelegraph notes, “Throughout its existence, Bitcoin has only been capable of processing around 7 transactions per second. To understand the magnitude of the situation, simply compare Bitcoin’s minuscule 7 transactions per second to Visa’s average of 24,000 per second.”

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Crypto lags far behind traditional payment players such as Visa when it comes to handling transaction volume (Source: Akeo)

At the moment, Bitcoin is not capable of handling heavy traffic on its network. Apparently, the Lightning Network will increase Bitcoin’s transaction rate to 1 million per second. How will this work? Essentially, the Lightning Network adds another layer to Bitcoin’s blockchain. Users will be able to set up payment channels on that layer and execute transactions. Supposedly, these transactions will be nearly instant, and cost-effective in terms of fees. To set up a channel on the Lightning Network, both parties must create a multi-signature wallet which they can both access. Information about transactions in this channel are only broadcasted to the Bitcoin blockchain once the channel is closed. In this way, users can conduct numerous transactions outside of the main blockchain and then record them as a single one.

Other Features of Lightning

Another aspect of the Lightning Network that could be a game-changer is the idea of ‘cross-chain atomic swaps.’ This service would give users the ability to swap one cryptocurrency into another — without using exchanges. As a result, the development could significantly disrupt the current exchange landscape. Bitcoin Cash could also come under threat — particularly since one of the differentiating factors between Bitcoin Cash and Bitcoin is Bitcoin Cash’s faster transaction rates.

Impressive Growth

Recently, in a 2018 Retrospective Report , Circle Research mentions the Lightning Network in a section called “Underpinnings of Progress.” The report, which is otherwise frank about the challenges facing crypto, portrays the lightning network as an area to be relatively optimistic about. Circle states that, despite lower network activity, due to the bear market, “By some measures, the underlying network even improved relative to 2017 in terms of lightning network adoption and lower transaction fees…”

Indeed, as Circle notes, the current value of Bitcoin held in Lightning channels is up 145 times from what it was a year ago. Similarly, the total number of advertised channels on the Lightning Network is 24 times higher relative to this time in 2018. The following chart appears on a slide titled, “Significant Lightning Network Growth.” Along with strong dApp activity, the Lightning Network growth is one of the few encouraging data points in an otherwise sobering read.

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The Lightning Network has grown exponentially in the last six months (Source: Circle Research)

According to a website tracking Lightning’s growth, 1ML.com , the number of channels is up 25 percent in the last 30 days. This corresponds with a 15 percent increase in overall network capacity. The most active location in the world is Toronto, Canada, which boasts 59 nodes. Other active cities include Amsterdam and Frankfurt.

Key activity statistics for the lightning network are up in the last 30 days (Source: 1ML.com)

Mainstream Adoption

Recently, Jack Dorsey, of Twitter, has expressed his support for the Lightning Network. Speculation began after Dorsey was part of a series of ‘pass it on’ #LNtrustchain tweets in which he tagged Lightning Lab’s CEO, Elizabeth Stark. Since then, it has been announced that Square’s cash app will support the Lightning Network. Dorsey made the announcement while appearing on Sephen Livera’s podcast earlier this week.

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Speculation began after Jack Dorsey tweeted about the Lightning Network

Concerns that have been raised with the Lightning Network include issues of security. As Cointelegraphnotes, “The system will work on top of the blockchain, but won’t actually have its security behind itself. Thus, it’s very likely that it will be mostly used for small or even relatively microscopic transactions. Larger transfers that require decentralized security will most likely still be done on the original layer.” In the same article, Cointelegraph mentions that channels on the network could be subject to caps, essentially, “users might need to choose between having liquidity within the Lightning Network channels and having liquidity outside of them, on the main blockchain. This is far from ideal, especially for those with rather limited resources.”

So, why are we, at Enigma, optimistic about the Lightning Network? As Forbes notes, the network will likely boost adoption. Lack of adoption is one of the biggest issues with the crypto market today since, even as bulls will admit, prices are still largely driven by speculation. Faster speeds make it more likely that consumers will actually use Bitcoin for what it was first intended: payments. According to Charlie Lee, founder of Litecoin, the Lightning Network an help Bitcoin to go, “from a speculative asset to real money.” Even if that does not happen overnight, we, at Enigma, are concerned that crypto growth may be outpacing the capacity of major platforms. As a result, we are encouraged to see Bitcoin leading the way with an innovative scaling solution of its own.

Early Innings

As Aaron van Wirdum notes in his piece, The Future of Bitcoin: What Lightning Could Look Like, “these are still the very early days of the Lightning Network. While the main implementations are usable and some wallets and other applications are available, Bitcoin’s overlay payment network is projected to improve over the next few years in areas ranging from network architecture to security and usability, and more.”

We, at Enigma, are excited to keep tracking the growth of lightning. In a somewhat frustrating time for traders, the innovations occurring on the network serve as an important reminder of the overarching mission of crypto. Lightning is continuing to grow. The project has a long-term vision, and it doesn’t care if the price of BTC is ticking up or down today.

— Aliya Itzkowitz, Enigma Team, London

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