DataLight Researches

Lightning Network Study. Will this technology become the new standard for Bitcoin transactions?

June 27, 2019

author:

Lightning Network Study. Will this technology become the new standard for Bitcoin transactions?

In one of the researches DataLight analysts have compared indicators of Bitcoin and other international payment systems. In that research we have concluded that the main obstacle on the Bitcoin’s way to mass adoption as a payment system were the low bandwidth and scalability. These problems are expected to be solved by the new Lightning Network technology.

Lightning Network is a payment protocol that operates on a Bitcoin blockchain and allows to carry out transactions at the speed of light. The main concept of this technology is that microtransactions do not need to be written on the blockchain, since making them “out of the chain” increases the speed of transactions tens of thousands times.

Basic Lightning Networks Terms:

  • Multi-signature address
  • Payment channel
  • Multichannel payments
  • Channel closure
Lightning Network Study illustation 1

To make a deal, both parties, or one of them, put the chosen number of bitcoins to the address with multi-signatures. Inside this address is fixed the amount due by each of the parties. As a result, a payment channel is created. The opening of the payment channel is recorded in the blockchain as a transaction with the total amount deposited.

Opening the channel makes Lightning payments possible. At the same time, the state of the balance changes with each payment. The payment amount is deducted from buyer and added to seller.

In addition to that, making payments does not necessarily imply opening new channels with other LN users. You can use the already existing channels to create a chain of funds transfer. These are multichannel payments.

In that case the buyer will pay the commission to the intermediary. You will find out the size of the commission below, but we will say in advance that these are the millionths decimals of Bitcoin. Thus the Lightning payment seeks the minimum path from the buyer to the seller without opening a new channel. Intermediaries are the nodes of the Lightning Network. It can be absolutely any user. The only condition is the availability of the required amount of payment within the channel.

The channel can be closed  any time, with any account balance. It is conducted after transmission of a report with the signatures of the both parties to the Bitcoin network. Miners check the signatures and distribute funds within the channel according to the balance sheet between the two parties. All unused balance will be returned.

As a result, a single transaction will appear in the blockchain reducing the load on the Bitcoin network, instead of thousands of micropayments.

Bitcoin vs Lightning Network

We decided to compare the two technologies in order to understand the extent to which the Lightning Network has developed and what its future prospects are.

The first thing to compare are the nodes.

From the graph it is clear that even now the number of Lightning nodes is only 2 times lower than that of Bitcoin, and it is achieved in just 1.5 years.

Currently, the volume of transactions conducted on the Bitcoin network is ~ 1,500,000 BTC per day:

And here are the figures for the total accumulated capacity of the Lightning Network (the sum of Bitcoins in all Lightning channels):

To  date, this figure is just over 1000 BTC. But it should be considered that this is only the total amount of the BTC on all channels, and the maximum transaction that can be conducted through the intermediary channel is now only 1 Bitcoin. Because only 2 channels have such an amount on the account (as of June 3, 2019). Therefore, to conduct a transaction for a larger amount, it is essential to deploy a new payment channel in the LN network.

So far, the accumulated capacity of LN is about a thousand times less than the daily volume of transactions in the Bitcoin network. This may seem like a huge lag, but certain aspects should be taken in consideration:

  1. LN is intended primarily for micropayments.
  2. Bitcoin network is used to transfer large amounts.

Based on this, it is obvious that these technologies have different purposes and it is not entirely correct to compare these indicators.

The graph also indicates that in mid-November the total capacity of the LN network increased almost three times and continues to increase at a tremendous pace.

And, probably, the most important thing for this research is a comparison of the bandwidth of the Bitcoin network and the Lightning Network.

Christian Decker, Blockstream engineer, assures that in the future 1 LN channel will be able to withstand 500 transactions per second. If there are hundreds of thousands of such channels, then the capacity of the Lightning Network can become practically unlimited and reach tens of millions of transactions per second.

Currently, the capacity of 1 channel is ~ 250 txs / sec, and the number of channels has already reached 35,000 units. Total bandwidth through existing channels in the Lightning Network is ~ 8,750,000 tps. Recall that in the Bitcoin network, this figure increased to 7.7 tps.

Any comments needed? Probably not.

And one more important advantage of the new technology:

Bitcoin already has a significant advantage in the form of low commissions when transferring large amounts and cross-border payments. Micropayments network is still inferior to traditional payment systems. The LN network can help Bitcoin to take leadership on this field also. The total amount of commission on the network is only 1 satoshi, with some nodes having 0 commissions. Certainly commissions can rise, but an increase in commissions to even $ 0.5 looks very doubtful over the coming decades.

Why Lightning Network (and not SegWit)

Imagine for a while that 10-15 years have passed and Bitcoin has become one of the leading means of payment. With a transaction size of 250 bytes and a daily execution of at least 2 transactions by each person (we take 1 billion of users as an example), it turns out the following:

Currently, the size of 1 Bitcoin block is 1Mb, which is a maximum of 144Mb per day. It turns out that to withstand such throughput it is necessary to increase the block by 23 times, which is a difficult condition for the network. In this case, the solutions proposed by SegWit can only increase the block to 8Mb. Even if it is possible to increase the block to 23Mb, this will be the maximum network bandwidth and further scalability will again be impossible. In addition, the size of the Bitcoin network will increase by 1TB per year. For comparison, for the first 10 years, the size of the Bitcoin network has risen just above 200GB.

Things are quite different with the Lightning Network.

CTO of Lightning Labs states that as the network grows, there will be an increase in the block inside the LN layer. Although the Lightning Network does not have the same concept of block size, each node in the network stores a picture of the state of the remaining nodes in the network, it helps to calculate the optimal transaction path from the buyer to the seller. This graph has a certain block size, which is currently 50MB, but this is far from the limit.

Thanks to LN, transactions can be performed in almost unlimited quantities at the highest speed, hundreds of times faster than in the Bitcoin network.

Unlike SegWit, the Lightning Network is more scalable and does not violate the original concept of Bitcoin.

Lightning Network challenges

Although this technology is breakthrough and has many supporters, it is necessary to mention some problems.

The possibility of centralization. The more money there is in an LN node account and the less its owner spends on servicing, the lower the commission he can set. In other words, the system encourages network centralization, which is contrary to Bitcoin’s goal.

On the other hand, at the very beginning, Bitcoin was also centralized, as only Satoshi Nakamoto and his followers were engaged in mining. Now the LN network is supported mainly by Bitcoin evangelists, who understand that centralization can destroy the system, which is just getting on its feet. Therefore, they should have enough prudence to not use the system to their advantage.

Small amount of transactions. Currently, there are small amounts on the LN-node accounts – up to 1 Bitcoin. Therefore, if the user wants to send more, then problems may arise, since he will not be able to create a chain of nodes within which there are enough coins.

Online transactions. Users can transfer money only if both parties are connected to the network.

Summary

The Lightning Network solves the problem of Bitcoin scalability and allows not only to compete with traditional payment systems (comparison with Visa, MasterCard and PayPal), but also to surpass them in main parameters:

  • Transaction rate
  • Scalability
  • Commission rate

Currently, the Lightning Network is at the stage of development and yet become very widespread. But as Bitcoin becomes more popular, the number of transactions, and in particular microtransactions, will increase. At this point, Lighting Network can be the solution that will attract a lot of people, and in the end it can give a new impetus for the development of Bitcoin. As a bonus, market will see the new record highs of the BTC.

Sources:

https://datalight.me/

https://bitcoinvisuals.com/lightning

https://lnmetrics.opdup.com/

https://lightning.network/lightning-network-paper.pdf

https://1ml.com/statistics

https://blockstream.com

Share this article