In this article we look at the current state of the Lightning Network, a Bitcoin layer-2 network that aims to offer cheap and fast micropayments.
While this layer-2 is growing organically, albeit at a slow pace, we are beginning to see some major challenges that need to be addressed in order for mass adoption to be achieved.
Amidst obstacles and opportunities, this is where the game is being played to decide the near future of the Lightning Network.
Below we delve deeper into the discussion.
The current situation of the Bitcoin Lightning Network
The Lightning Network is Bitcoin’s layer-2 network, which uses off-chain data computation to offer its users an infrastructure for digital micropayments.
Cheap transactions with near-instantaneous execution speed are possible on this network.
According to Blockstream data, the Lightning Network can process 40 million transactions per second: much more than “super-scalable” blockchain networks like Solana and traditional payment infrastructures like Visa.
The fees on this layer-2 blockchain are really low and are roughly 0.003% compared to the amount transacted.
A lot of progress has been made since its launch in 2018, with the push from bitcoiners who have increasingly expanded the reach of the network.
Within just five years, the Lightning Network has reached a locked-in value of about $140 million (4,770 BTC), which still remains an extremely small value when we consider that the main infrastructure it relies on capitalizes over $570 billion.
However, this should be related to the essence of this technology, which essentially serves as a network for payments and deviates from all typical DeFi use cases such as staking, lending, yield farming, etc.
The growth of Bitcoin’s Lightning Network continues to progress in a clear and organic manner, even if at a really slow pace.
Compared to a year ago, the number of Lightning nodes has increased by only 1,500, hinting that there are still structural problems and challenges to be addressed before the interest curve starts to rise in earnest.
On the other hand, from March 2022 to March 2023, we saw a sharp decline in this metric with a loss of nearly 5,000 nodes due to the bear market crisis.
Currently we can count a number of 1890 nodes in the infrastructure working to enable full off-chain data transfer.
Compared to the all-time high we are still down by about 1000 nodes, while compared to 2020 the numbers have increased sharply.
Lightning Network: 3 challenges ahead
The slow growth of the Lightning Network is essentially due to 3 challenges that the Bitcoin community must face if it wants its network to one day compete with the major payment infrastructures on a global scale.
First, as a first obstacle we find the factor of balancing Lightning channels, which is still inefficient and inconvenient whenever a large balance payment is to be made.
If the amount of BTC we want to send via the Lightning Network exceeds the channel capacity, we will be forced to find (with some difficulty) a well-funded node with a direct channel to the recipient.
This hiccup, combined with the cost of opening and closing each channel, which requires payment of a fee on two on-chain transactions, severely limits mainstream development of the technology.
Viktor Bunin, an expert on the topic who works at Coinbase Cloud, has this to say about it:
“This capital inefficiency at the edges for non-custodial users is a hard and annoying optimization problem, and it’s objectively worse than an account-based model with arbitrary transaction sizing. However, it’s not an unworkable problem.”
Second, there are upstream problems on the security factor that have yet to be resolved.
In particular, insiders’ concerns relate to the instances of when a node goes offline and becomes unable to process payments in the channels where it is connected.
The interruption of a payment could irreversibly lead to the loss of funds of users who are using that node.
However, there are solutions that allow background activities to be used in mobile devices while limiting the efficiency of the hardware itself.
This factor definitely needs to be improved, and smarter solutions need to be found so that the network becomes as secure as third-party providers.
Finally, as a final limitation to mass adoption we find the difficulty merchants have in understanding the technology and applying it to their businesses.
Unfortunately, we are still at a time when most of the world’s population does not fully understand what Bitcoin is and how the trading protocol works.
Cognitive barriers combined with the “problem” of cryptocurrency volatility are pushing many merchants away from the idea of implementing a Lightning solution as an alternative payment system.
Uncertainties on the regulatory front are also inducing concerns in no small measure, especially in the recent period where the SEC has made scorched earth in the crypto sector in the United States.
Recall that in reality it would be easy and inexpensive for merchants to integrate the Lightning Network given that there are a variety of applications nowadays, such as Zeus and OpenNode that allow users to pay in Bitcoin using a QR code or via NFC scanning.
Opportunities for the growth of Bitcoin’s layer-2
For the Layer-2 Lightning Network, we find not only challenges and impediments but also opportunities that must be exploited to take the Bitcoin protocol to the next level.
In any self-respecting technological invention, the adoption curve begins to rise exponentially only when the average user is able to use it quickly and easily.
The Internet became popular when accessing it had no longer become a nerd thing and its use was practicable in a clear way, even if the end user had no knowledge of what computer protocol was in reality.
Similarly, Bitcoin and the Lightning Network will become mainstream when individuals are able to take advantage of them through an application with a user-friendly interface while not knowing what underlies the technology.
In the end, what matters to the masses is the end effect that a given invention brings, not the processes involved in arriving at that result.
In this sense, the integration of the Lightning Network on the world’s largest cryptocurrency exchange, namely Binance, could be the beginning of an era in which transiting money through this network will become easy.
While we know that exchanges go in the opposite direction of Bitcoin’s main philosophy, being themselves third-party platforms similar to financial institutions, we still have to admit that this path is the easiest one to take to achieve real growth.
There is a “risk of centralization” that must be managed and accepted.
The real capital will only come when even the occasional closed-minded person who understands nothing about cryptocurrency is able to make a transaction on a Lightning Network via an app on a smartphone.
Before then, this fantasy world will remain closed and used only by experts and enthusiasts in the field.