Lightning Network (LN) is a “layer 2” payment protocol that runs outside the Bitcoin Blockchain. The protocol is executed in a network of nodes apart from the blocks of Bitcoin’s Blockchain and allows high-speed transactions between users of those participating nodes. Lightning Network is widely known as a solution to Bitcoin’s scalability issues.
LN is composed of a Peer-to-Peer system in which micro payments are processed with Bitcoin through a network of payment channels. Channels are interconnections between nodes. As such, LN is a second layer that allows users to transact with Bitcoin off-chain. When two users transact through LN, the transaction is recorded in LN rather than in the Bitcoin Blockchain.
Bitcoin on-chain transactions are notorious for being very slow and expensive with block times of about 10 minutes of length and this is also the average confirmation time for a transaction when the Blockchain is not congested. LN makes nearly instant transactions and sub-satoshi fees possible. It is also possible for it to scale to 100,000 transactions per second.
The power of the Lightning Network as a whole is usually measured through the capacity of its channels. Bitcoin Visuals, a website dedicated to publishing data on the performance of Bitcoin (BTC), had verified a daily median capacity of 1.1m Satoshis (SAT) on LN during November, while in the first weeks of December it is reporting more than 3.3m SAT for the Network (Chart in https://bitcoinvisuals.com/ln-capacity).
This measurement considers the Network as a whole. If one was to analyze the capacity of specific nodes, it is possible to see some nodes that have had their capacity increase much more. Nodes in the 10th percentile have touched the level of 50,000 SAT, doubling their performance of just one month ago.
LN was launched in January with a few dozen nodes. By mid-December, however, the number of nodes is over 2000. LN is the silent super Network that many investors are not taking into account when valuing BTC. But, as soon as it starts functioning at full capacity, according to the engineers developing it, Bitcoin’s transaction power could boost to the same level of Visa and MasterCard, or potentially much higher.
Its solution is providing a way to process global, instant, decentralized transactions using BTC and naturally is attracting merchants. The LN team is developing software exclusive for brick-and-mortar businesses. In a few thousand businesses, primarily online, their technology has already been integrated. It is also attracting Bitcoin’s holders, many of which are uploading their BTC to the Network. By December, according to Bitcoin Visuals, more than 2 million dollars worth of BTC is being held in LN.
Some other big players are after the foreseeable bullish effect of LN on the price of Bitcoin, like BAKKT and other institutional investors. LN is one the first of many potential decentralized second layer solutions that can help Bitcoin turn even more powerful than the biggest international banks. Finally, the dream of drinking coffee and paying for it with Bitcoin seems to be closer to coming true. Analysts do not hesitate when estimating that, if drinking coffee with BTC materializes, new all time highs will almost surely be reached soon.
What do you think about the potential of the Lightning Network and its eminent effect on BTC?