Scalability on Bitcoin: The Rising Adoption of the Lightning Network
Despite its mutiple benefits, Bitcoin (BTC) and many other networks have witnessed for many years loud criticism when it comes to scalability. In this post, we will dive deep into the nitty-gritty of the Lightning Network. We will explore its technical aspects, how it works, its advantages over other Bitcoin scaling solutions and its rapidly increasing rate of adoption evident by its high-profile integrations.
Why Is Scalability An Issue for Bitcoin?
Scalability is, in fact, one of the three factors in the famous blockchain trilemma along with decentralization and security. For the uninitiated, the blockchain trilemma states that at any given time, only two out of the three features can be achieved by any blockchain. These combinations can either be scalability-security, scalability-decentralization or security-decentralization.
Security and decentralization have always been the corner stones of the Bitcoin proposal. Preserving the hash-rate as high as possible as well as making the cost of running a fully validating node trivial, has always been of paramount importance. Unfortunately though, the scalability problem is still present.
At the time of writing, executing a regular Bitcoin transaction requires the sender and the recipient to wait for several minutes (sometimes hours). There have been numerous attempts in the past to supposedly increase Bitcoin’s TPS rate which have only led to forks such as Bitcoin Cash which didn’t have any major acceptance neither from retail nor institutional investors.
Technically, both BCH and BSV increased the size of the blocks being produced to fit a greater number of transactions. While this feature definitely enhances scalability, it poses a huge threat to the security of the underlying blockchain which can be witnessed in the form of repeated successful attacks by malicious actors on these blockchains. The infamous 51% attack becomes a lot easier if the target blockchain’s security is not up to the mark.
In order to scale without compromising security and decentralization, the Lightning Network has proven many times to have the right approach.
Lightning Network 101
Simply put, the Lightning Network is a decentralized layer-2 payment infrastructure that works on top Bitcoin’s blockchain. For the uninitiated, a layer-2 protocol is typically an advanced iteration of a base-level protocol with enhanced speed, scalability and security. Accordingly, the Lightning Network is a scalable, secure and instantaneous payments protocol that allows users to send and receive BTC at a fraction of time compared to a normal transaction on the native Bitcoin network.
All transactions that occur on the Lightning Network are faster and cheaper. The Lightning Network can offer enhanced performance because all its transactions are settled off-chain. In addition, the Lightning Network can be leveraged to enable and execute off-chain transactions that involve the exchange of crypto assets through atomic swaps.
For the uninitiated, atomic swaps is a novel blockchain technology that leverages smart contracts to facilitate the exchange of one cryptocurrency for another without the involvement of any kind of centralized intermediary. This mechanism ensures that users are always in the custody of their digital assets, safeguarding them from any externalities.
The Lightning Network was first proposed by two researchers, Thaddeus Dryja and Joseph Poon in a paper dubbed “The Bitcoin Lightning Network” in 2015. Largely derived from the initial writings of the anonymous Bitcoin founder Satoshi Nakamoto, the Lightning Network whitepaper positioned the protocol as the payments-oriented solution that would help scale BTC and provide wider adoption.
Lightning Labs initially worked around the clock to make the off-chain protocol compatible with Bitcoin Core. It was in 2018 when Lightning Labs finally launched the public beta of its Lightning Network implementation on Bitcoin’s mainnet.
The Benefits of Lightning Network
The benefits of the Lightning Network and the role they played to foster mainstream adoption of Bitcoin cannot be overstated. Here are some of these key benefits:
A major and perhaps the most significant benefit of the Lightning Network is that it enables instantaneous transactions with a fraction of the cost that users would otherwise have to pay if they conduct the same transaction on the Bitcoin network.
To facilitate rapid-speed transactions, the Lightning Network allows transaction routing from the famous privacy-oriented and VPN-friendly internet browser TOR. Specifically, the Lightning Network taps the browser’s onion routing mechanism that allows Lightning nodes to execute transactions while at the same time keeping the underlying BTC in an encrypted form until it has reached its destination address. The Lightning Network can process up to 25 million transactions in a single second which is later settled on the main chain as a single transaction.
Since the Lightning Network is a Bitcoin-based layer-2 protocol, it also shares virtually the same security as that of the premier cryptocurrency. Notably, the Lightning Network functions as a networked multi-directional channel that allows payments to be routed in bundles across multiple channels.
A recent report brought to the limelight several interesting insights and facts about the Lightning Network’s security. According to the report, the network security of the Lightning Network could be far more resilient than any of the centralized payments processing firms. In addition, the Lightning Network was also found to have the ability to handle far more transactions than Visa at the same time.
Off-chain transactions not only enable fast settlement without compromising security but also pave the way for cost-efficient transactions that require trivial transaction fees compared to the base layer. For the Lighting Network, the base fee per transaction stands at 1 satoshi (0.00000001 BTC) or close to 0.04 cents. This cheap fee is in stark contrast to that of the main chain.
In addition to enabling low transactions fees for BTC users, the LN also preserves the users’ privacy. As previously discussed, the Lightning Network uses a multi-hop transaction approach where every transaction participant or peer requests to pay the next peer. This ensures that at any given time, a peer only knows the peer who has requested them to pay and the next peer they are required to pay to.
Thanks to the onion routing of payments, no peer ever knows the complete chain of transaction participants or who the payment is finally being delivered to. This means that the sender has a greater privacy benefit compared to the receiver as only he knows the destination address and not even the immediate peer can tell for certain if they received the request to pay from the original sender or just another preceding peer. Moreover, with the upcoming implementation of the Bitcoin Taproot upgrade, it is expected that some of those benefits will also cascade to the Lightning Network to further bolster its privacy facet.
What are Lightning Network Nodes?
Now that we have discussed some benefits of the Lightning Network, let’s focus in one of the most important pieces of the puzzle: the Lightning Network nodes.
In simple words, a LN node is essentially software that interacts with both the main chain and the Lightning Network. A node in the Lightning Network can be considered as a tool that enables users to enjoy the benefits of the Lightning Network while also playing a crucial role in relaying information to and from the main chain.
There are several benefits for running a Lightning Network node. First of all, it functions as a gateway to the Lightning Network ecosystem which means that if one wishes to interact with the Lighting Network seamlessly, it is recommended for them to run a node. Additionally, running a Lightning Network node ensures that the user is not required to interact with any intermediary and has complete custody. Finally, running a node also entitles the user to earn some sats by routing payments.
The rate of adoption of Lighting Network nodes has been astronomical, to say the least. In July 2021 alone, the Lightning Network capacity had ballooned by 20%, surging to 1,821 BTC locked across more than 56,000 channels. The pace of adoption can be estimated from the fact that it took almost a year for the number of Lightning Network nodes to double from 5,000 to 10,000.
The Rising Adoption of the Lightning Network
While we have already discussed the rising number of payment channels and nodes as an indicator of the rising adoption of the Lightning Network, we will now have a look at some of the macro-level developments that can change the game for good.
El Salvador Adoption
Earlier this year, Bitcoin received arguably its biggest endorsement to date when the country of El Salvador adopted BTC as legal tender. The country’s President Nayib Bukele announced on September 7 that the Central American nation had adopted Bitcoin as legal tender and that, effective immediately, all merchants and service providers in the country had to accept payments in Bitcoin.
The Lightning Network saw close to 2,000 new channels opened with 100 BTC since the El Salvador Bitcoin announcement. The steep surge in the number of new Lightning Network channels indicates the rising awareness for the leading Bitcoin layer-2 solution.
It’s fair to say that despite the global criticism being faced by El Salvador for adopting BTC as legal tender, there are not many reasons the country would regret its decision as the pace of adoption continues to rise, partly aided by the scalability services provided by the Lightning Network.
In September 2021, the leading Bitcoin wallet running on the Lightning Network, announced the launch of its highly-anticipated Strike API platform that allows Twitter users to integrate the feature onto their profile to seamlessly tip Bitcoin to anyone on the social media platform. The partnership between Strike and Twitter means that a total of 206 million Twitter users now have ready access to a Lightning Network powered product that allows anyone across the world to send and receive Bitcoin within seconds.
In addition to tipping BTC to other users on the platform, the Strike API can be used by marketplaces and merchants to benefit from instant, cheap and secure payments in the form of Bitcoin. While the Strike API is currently only available to US and El Salvador users of Twitter, there are plans to expand the services across other countries in the future.
The State of the Lightning Network in 2021
In 2021, the Lightning Network hardly bears any semblance to the novel idea that it was during its launch back in 2016. All metrics such as the amount of BTC locked, the increasing number of payment channels as well as the rising number of nodes and users, depict the rapid pace of Lightning Network’s adoption. In addition, there is an entire nation that is utilizing Bitcoin via the Lightning Network and with more countries probably following El Salvador’s trail in the short term, we should expect the Lightning Network to become a stronger force in the upcoming years.
Finally, an increasing number of cryptocurrency exchanges have also started integrating Lightning Network services to enable users to withdraw a small amount of BTC in seconds with close to negligible withdrawal cost.
Bitcoin has come a long way from being dubbed magic internet money during its early years to getting a fully regulated BTC futures ETF approved by the US SEC a few days ago. As Bitcoin’s adoption grows, so will the demand for a reliable tech platform that can help BTC scale efficiently. The Lightning Network is without a doubt the de-facto choice.