Bitcoin Lightning Network, the future of payments?

It’s a payment network built on top of Bitcoin. It relies on Bitcoin to enter and leave the network, or settlement, but other than that is a separate protocol with very different rules to the Bitcoin protocol.

What is the Bitcoin Lightning Network?

It’s a payment network built on top of Bitcoin. It relies on Bitcoin to enter and leave the network, or settlement, but other than that is a separate protocol with very different rules to the Bitcoin protocol. The Bitcoin Lightning Network, from now on referred to as Lightning, was conceived as to overcome many of the problems of using Bitcoin as a payment mechanism – for example:

  • For Bitcoin participants it can be up to an hour before a payment is safe to accept. Lightning payments are normally processed in near real-time, typically 10s or less.
  • Bitcoin transaction fees can spike when the network is busy and make small payments uneconomical. Lightning uses a peer-to-peer network where each node can set its own fees and expensive nodes can be avoided.
  • Bitcoin has a lower limit for the size of a transaction output, commonly referred to as the dust limit which is typically around 546 Satoshis (EUR0.00022). Lightning allows payments as small as 1 milli Satoshi (EUR0.000006).

How does it work?

The Lightning network is open to anyone and can be joined by running Lightning node software of which the main two variants are Lightning Lab’s lnd and Blockstream’s Core Lighting.

The NoFrixion Lightning nodes are currently using lnd. Once the Lightning software is installed channels need to be opened with other nodes so that payments can be send and received. To open a channel Bitcoin must be committed to the Lightning node’s wallet. When a channel is closed the Bitcoin can be transferred out of the Lightning nodes’s wallet.

What’s the point?

There are already card and bank payment networks why introduce another one?
There are many reasons, such as:

  • Cost: The fee for a Lightning payment can be 0 for directly connected channels. For multi-hop payments each node in the path will typically charge a flat fee plus a percentage of the payment, for example:
  • 1 Satoshi * + 0.01% (or 100 Satoshis for every 1 million Satoshis transferred)
  • Open and decentralised: Being an open public network means Lightning is open for innovation by anyone who can convince the community of the benefits of their proposal. This is the same approach as the Bitcoin network. An example of Lightning improvement proposals are available but as nobody owns, or controls, the process improvements can come from anywhere.
  • User Experience: Apple and Google Pay have arguably made the card payment experience very low friction for users and can be considered best of breed. A Lightning payment experience from a mobile wallet is as good as, or better, than Apple and Google Pay. The steps in using a mobile wallet to make a Lightning payment are:
    • Scan a QR code containing the Lightning payment invoice,
    • Check the amount,
    • Authorise.
  • An example screenshot from the Zap Lightning wallet is shown below.

Payment Network Comparison

To finish here is a table showing a comparison between Lightning, cards and the traditional bank payment networks (for the EURO area this means the Single European Payment Area (SEPA) network but other banking networks are equivalent).

  Lightning Cards Banks
Fees 0.01 + 0.05% 0.20 + 1.5% 0.20
Limits <0.01 to ~8.5k
(large payments can be automatically split into multiple smaller ones)
unlimited 15k (SEPA-Inst)
< 1million (SEPA-CT)
Processing Time Typically <10s Typically less than 60s <10s SEPA-Inst
Typically 6 hours SEPA-CT
User Adoption Low High High
User Experience Awesome With Apple/Google Pay: Good
No Apple/Google Pay: Poor
Poor
Innovation Very High Very low (only very large companies can influence the card associations) Low (open banking now offers limited areas for innovation)

* Satoshi is the smallest unit of the Bitcoin cryptocurrency. It is named after Satoshi Nakamoto, Satoshi Nakamoto is the name used by the person or persons who developed the Bitcoin protocol.

 

About the Author

Aaron Clauson

Aaron is CTO here at NoFrixion. He was Senior Blockchain / Embedded Software Engineer for Metaco SA of Switzerland, where he developed one of the first enterprise-grade digital asset custody solutions. He is a Bitcoin core developer and holds a BEng in Electronics and Communications from the University of Tasmania.

Find out more about Aaron on our teams page.

 

 

Share this article: