Lightning Network Primer

What is the lightning network, and how does it change the game for Bitcoin?

What is the Lightning Network?

The lightning network has been on track to change the game for Bitcoin. Drafted in 2015 and launched in 2018 by lightning labs, the lightning network has made leaps and bounds for Bitcoin in multiple areas, some of which are still yet to come. Using native smart contract scripts of Bitcoin, Lightning gives the ability for users to make near-instant payments at less than a cent. This low-cost scalability solution brings micro-payments to the forefront of our everyday lives. Historically Bitcoin has had a transaction rate of about 7 transactions per second. Legacy solutions like Visa took 30 years to get to 40k transactions per second, Lightning has the ability to scale to 100k or more.  

Growth of the Past Few Years

Lighting has grown at an incredible rate over the past few years. Because of the growing ecosystem and open-source nature of the technology, many developers are able to build and add value to the payment systems network, bringing new innovations on top of Bitcoin’s Baselayer.

(https://bitcoinvisuals.com/ln-capacity)

After an explosive growth in the Bear market, we have seen a building period of the technology, grow into a huge rise in the number of Bitcoin inside lightning channels. The orange line is the number of Bitcoins in channels and Blue being the dollar amount. This means Bitcoin is being added to more and more channels, giving the network the ability to create more connections and liquidity.

(https://bitcoinvisuals.com/ln-channels)

A good way of understanding what a lighting channel is is by comparing it to a bar tab. You keep an open channel (tab) with someone (bartender), and every time you interact (buy a beer), those Bitcoins are sent through the channel. Once you finish the transactions, you close the channel (tab), and that interacts with the base layer of Bitcoin sending it to the on-chain wallet. The beauty of the lightning network is that even if you don’t have a direct channel with someone, you can find a path through other nodes, making a number of hops to the final destination.

Scaling with the Lightning Network

Being that Lightning is an open-source network, people can opt-in and create new functionalities. Umbrel has been a huge contributor to a plug-and-play way of getting onto the lightning network, making it easy to set up your own node. Other apps like Muun and Strike have made transacting on the lightning network extremely easy, and it’s only getting better from here.

Bitcoin’s base layer benefits hugely from Lightning and transaction fees are reduced largely because of how secure lighting is to use. Previous to 2018, transacting on Bitcoin’s base layer was extremely costly in times of congestion.  With exchanges like Kraken implementing lightning payments, this will save the users, exchanges, and base layer a huge amount of congestion causing a cascade into lightning as other exchanges get more competitive.

Peer to Peer Network and the Creator Economy

It’s not only the plebs and exchanges that see benefits but content creators as well. Substack just recently announced in partnership with Opennode, they are giving subscribers the ability to send Bitcoin over the lightning network to pay for subscriptions. This is huge for the content creator community. In the future, it may be possible to send micropayments to read single articles, rather than subscribing. Adam Curry’s Podcasting 2.0 has also made waves in the lightning and podcasting community promoting podcasting to what his original vision was, “Value 4 Value”. An app called Sphinx Chat allows you to listen to podcasts, stream sats every minute, and even send tips. There have even been talks about Jack from Twitter implanting lightning payments in the app itself. Imagine joining a Twitter Space and being able to tip the speakers sats for useful information, real-time.

Cross Border Payment Technology

One of the biggest innovations using Lightning is in the form of cross-border payments. In 2019, Jack Mallers announced a new platform called Strike, which used lightning and Bitcoin infrastructure to implement cross-border payments. It converts dollars in real-time from your account, sends them over the lightning network, instantly and converts back to dollars. So, say you were an immigrant working in the United States wanting to send money back to your family, usually, you would have to pay anywhere from 10% – 50% in fees through western union and conversion, just to get that money back home. With strike and the lightning network, you can send that money back for less than a penny.

Lightning and the Future of Bitcoin

As the Bitcoin Lightning Network grows in adoption, Bitcoin is beginning to transform into a high transaction rate currency without borders. Before, Bitcoin’s base layer was the first and most decentralized immutable ledger, but it was slow. Layer 2 is starting to transition us into the world that we all knew was possible. It is faster, more decentralized, and boundless. Layer 2 allows Bitcoin to act more like a currency with high transaction throughput. Couple this with the ability to add stacks of code and build technology layers like the internet, and it becomes an unstoppable force.