Crypto Currency News
Bitcoin
$65,978.16
-377.82
Ethereum
$3,523.48
-26.99
Litecoin
$77.70
-1.9
DigitalCash
$24.97
-0.74
Monero
$173.75
-1.49
Nxt
$0.00
-0
Ethereum Classic
$24.23
-1.17
Dogecoin
$0.13
-0

Is Lightning Network’s 433% capacity increase enough to make digital money with Bitcoin?

Neither the author, Tim Fries, nor this website, The Tokenist, offer financial advice. Please consult our website guidelines before making any financial decisions.

Bitcoin’s original vision included a “peer-to-peer electronic cash system”. Today, Bitcoin is largely considered an asset, but not a currency. In order for cryptocurrencies to become “currencies”, they must meet the main requirement of offering near-instant transaction speeds at negligible fees. In combination with decentralization, this requirement brings added value – that is exactly the goal of the Lightning Network.

What’s the problem with cryptocurrency transfer speeds?

When the pseudonym Satoshi Nakamoto first published the whitepaper Bitcoin: A Peer-to-Peer Electronic Cash System, little suspected that Bitcoin would turn out to be a commodity and not a digital currency. Intended as digital cash for everyday use, the developers of Bitcoin Core constantly moved away from this vision and left the transaction speed of 7 transactions per second (tps) behind.

Image courtesy of howmuch.net

It’s not that they had a wide range of choices, however. To increase Bitcoin’s transaction speed, the original block size limit should have been greater than 1MB. The larger the memory block, the greater the space to hold and execute transactions.

In addition, Satoshi deliberately implemented this 1MB block size limit to prevent centralization and hid the limit. In addition to limiting the Bitcoin network to 10 minutes per block creation time, this is the throughput capacity of the blockchain.

From its peak in April, Bitcoin’s average transaction fee fell 94%, from $ 62.79 to $ 3.4 per transaction. Image courtesy of ycharts.com

In order to increase the memory block, in the end there should have been a network-wide consensus on the number of node operators (miners). When the consensus failed, a Bitcoin hard fork was born – Bitcoin Cash (BCH). As the name suggests, it was specifically developed as a continuation of the original vision – digital cash with high transaction speeds and low fees.

Unfortunately, that did not happen either. Although the block size of BCH is dramatically larger at 32MB, there is another problem to consider – the Hashing power of the network represented as hashrate.

The hashrate of Bitcoin Cash (BCH) is only 0.83% of the hashrate of Bitcoin (BTC). Image courtesy bitinfocharts.com.

Since BCH did not get the attention it needed, there are few node miners that produce enough hashing power to prevent a double-spend attack. In turn, crypto exchanges have had to enforce their own preventative measures by increasing the number of confirmations required to process transactions.

As a result, Bitcoin Cash was in a very unfavorable position. For example, the Kraken crypto exchange implemented 15 confirmations, keeping the BCH transaction time at a snail’s 2.5 hours. In contrast, Bitcoin only requires 4 confirmations, which corresponds to up to 40 minutes.

Join our Telegram group and never miss an update from the world of DeFi.

The Growth of Lightning Network in 2021

As you can see, VISA’s centralized network, while fiat currency is not digital cash, is effectively transforming it into electronic cash suitable for near instant daily payments. In contrast, Bitcoin and Bitcoin Cash have to pay for their decentralization:

  • The hashing performance of the network, which depends on the number of nodes available.
  • A memory block limit and network consensus to increase it.
  • Average block creation time.

Although the Witness (SegWit) protocol upgrade in 2017 increased Bitcoin’s block limit to 2MB, or theoretically 4MB, this is still far behind VISA’s ideal of near-instant payments. However, the problem is effectively solved in the form of Layer 2 scalability – the Lightning Network (LN).

Image courtesy of TheBlockPro.com

Built on top of the main chain (L1) of Bitcoin, the network offloads traffic via payment channels and returns it to the main chain as multi-batch transactions. The result is impressive. The Lightning Network offers a theoretical speed of up to one million tps at around 0.04 cents. Suffice it to say that due to the high demand for this Layer 2 approach, 2021 was marked by the Lightning Network’s takeover of Bitcoin traffic.

Image courtesy of Arcane Research.

Such a high adoption rate also explains why the main chain of Bitcoin has such low fees compared to April. On December 1st, 2021, the Lightning Network can process a cumulative volume of $ 168.6 million or 3,308 BTC, an increase of 433% over the beginning of the year.

Image courtesy of Bitcoinvisuals.com

Additionally, Bitcoin isn’t the only one using the Lightning Network and becoming VISA-like. Just like with Bitcoin, Litecoin (LTC) performed a SegWit upgrade in 2017 that enabled it to use the Lightning Network. Both Bitcoin and Litecoin have a similar code architecture, which makes upgrading Litecoin a lot easier.

Accordingly, the Lightning Network enables atomic swaps (automatic exchange between different blockchains) between LTC and BTC. Without the Lightning Network, LTC would have 12 confirmations and 30 minutes of transaction time, which is better than BTC, but not by much.

The finances are changing.

Find out how, with Five Minute Finance.

A weekly newsletter that covers the major trends in FinTech and decentralized finance.

Try it out (free)

brilliant

You have subscribed.

You are well on your way to find out more.

What about Ethereum and other cryptocurrencies?

All Ethereum users are familiar with its notorious problems with high gas fees as well as L2 protocols – suggested solutions – in the form of arbitrum and loopring as a few examples. These are L2 scalability solutions similar to the Lightning Network that will help Ethereum transition to a proof-of-stake blockchain sometime in H2 2022. Currently, Ethereum requires 20 confirmations and around 5 minutes in terms of transaction time.

There are now cryptocurrencies with their own blockchains that enable almost instant transfers. (As a reminder, VISA’s daily TPS is around 1,700 while the theoretical 24,000):

  • Solana (SOL) – with a fee of $ 0.00025 at a theoretical 50,000 TPS.
  • Stellar Lumens (XLM) – $ 0.000003 at 1,000-5,000 TPS.
  • Terra (LUNA) – USD 0.01 fee up to theoretically 50,000 TPS.
  • Ripple (XRP) – $ 0.0003 fee at 1,700 TPS.

But even together they have a small crypto market share compared to Bitcoin (BTC) and Ethereum (ETH). In pure numbers, the four lightning-fast cryptos account for 5.7% market capitalization versus BTC / ETH, or $ 76 billion versus $ 1,317 billion.

Have you used the Bitcoin Lightning Wallet or do you think BTC is too much digital gold to bother? Let us know in the comments below.

About the author

Tim Fries

Tim Fries is the co-founder of The Tokenist. He has a B.Sc. in Mechanical Engineering from the University of Michigan and an MBA from the University of Chicago Booth School of Business. Tim was a senior associate on the investment team in the US Private Equity Division of RW Baird and is also a co-founder of Protective Technologies Capital, an investment firm specializing in sensor, protection and control solutions.

Comments are closed.