There has been a lot of talk about Bitcoin’s future when it comes to scaling up transaction throughput. One of the big additions that is often brought up is the Lightning Network, though this comes with both pros and cons. Let’s take a look at what it brings to the table.
The Lightning Network is a system of interconnected channels or blockchains that are all backed by Bitcoin. A great example of this that’s always brought up is the U.S. dollar when it was under the gold standard. While you would transact in USD, it was backed by gold, and that was the ultimate form of payment settlement. In Bitcoin’s case, it allows for things like micropayments that are fully handled off-chain and then settled at some point on the chain, cutting down on the number of transactions sent while still allowing full utility and fund control.
The downside to this system is that each transaction is then tracked through Lightning Channels, rather than the main blockchain. Due to Bitcoin’s transparency, it becomes a question as to how much data is needed: every detail or just the end results.
We’re already seeing lower fees on transactions as a result of SegWit, but the Lightning Network further reduces them due to the fact that you aren’t spamming a blockchain with transactions. While it may seem like a great idea from the idea of saving, it does bring about a potential issue: Bitcoin’s sustainability is somewhat fee-driven. Bitcoin’s incentive to keep mining (which comes at a cost) is that it rewards users with bitcoins. As of now, there are still base mining rewards, however, as time goes on and it keeps halving, it will eventually get to a point where fees are the only rewards. So while low/nonexistent fees are great for the end user, they do not fare as well for Bitcoin’s network and usability as a whole.
Lastly, the system allows for instant transactions. It’s been said that due to how it works, it can lead to the handling of billions of transactions a day, not just rivaling major online processors but overtaking them. This is something that’s needed, by far, because we really can’t have mass adoption without it — with the current setup, Bitcoin can handle far less than 20 transactions per second, so even with just 1% of the population using it, we’d be looking at delays of weeks or months before long.
The downside to this setup is that security and transparency are dropped on a per-transaction basis. For example, if I’m sending you 0.001 BTC per 15 minutes of your help and you help for 45 minutes, the BTC blockchain may see that I sent you 0.003 BTC. But the actual transaction would be three sends of 0.001, giving transparency into calculations and exactly how the deal took place and was carried out. In the vast majority of cases, this would be irrelevant, as we just care about the end result. That said, it’s worth noting because it does slightly deviate from the “every transaction is visible” idea BTC is known for.
It’s no secret that being able to scale is paramount to Bitcoin’s success. The Lightning Network is a huge step forward for this, bringing about a lot of strong benefits and some negatives to go with them. With time, however, some of these things may be mitigated, making the need to swap even more compelling.