In the previous article “What is the Lightning Network,” we briefly introduced the concept of the Bitcoin Lightning Network. As a P2P network built on the Bitcoin blockchain, the Lightning Network aims to address the bottlenecks of Bitcoin in terms of scalability and transaction speed. It is not a blockchain, nor does it belong to Rollup technology, but cleverly achieves instant, low-cost, and scalable micropayments through the use of off-chain payment channels and smart contracts, while maintaining decentralization and security. In the Bitcoin community, the Lightning Network has been regarded as one of the most orthodox and promising Layer 2 solutions.
In today’s article, we will continue to introduce the Lightning Network, clarifying its necessity and importance.
Solving the “Slow and Expensive” Problem of Bitcoin#
The Lightning Network is specifically designed to solve the scalability issues of Bitcoin, it perfectly aligns with Bitcoin's underlying protocol and can be implemented without any changes to the Bitcoin core protocol. In terms of improving transaction speed, lowering transaction amount thresholds, and reducing transaction fees, the Lightning Network has advantages that are hard for other Layer 2 solutions to match, making it the ultimate scaling solution for Bitcoin.
1. Improving Transaction Speed#
The Bitcoin network generates a block approximately every 10 minutes and can process a maximum of 7 transactions per second. In contrast, traditional payment tools like Visa can execute thousands of transactions per second, and during the Double 11 shopping festival, Alipay's payment TPS can reach hundreds of thousands.
The Lightning Network opens payment channels off-chain, allowing users to conduct multiple transactions within these channels, relying solely on smart contracts without requiring global confirmation, significantly enhancing processing efficiency, making it particularly suitable for payment scenarios that require rapid responses. Under current network conditions, the estimated transaction volume limit for each Lightning Network payment channel is 500 transactions per second. According to 1ML statistics, there are currently 48,620 active payment channels in the Bitcoin Lightning Network, which means the theoretical TPS of the Bitcoin Lightning Network can reach 24.31 million. As long as the number of nodes in the Lightning Network increases and payment channels expand, the TPS of the Lightning Network can continue to rise, theoretically without limit, which is one of the reasons the Lightning Network is hailed as the ultimate scaling solution for Bitcoin.
*Note: The TPS of LN in the above image is derived from 500 TPS x 85,000 channels, while the latest number of LN channels is 48,620. Image source: *https://glossary.blockstream.com/lightning-network/
In addition to significantly improving transaction speed, the Lightning Network also alleviates congestion on the Bitcoin mainnet by diverting transaction volume, allowing important transactions that truly need to be on-chain to be confirmed more quickly, bringing positive effects to the entire Bitcoin ecosystem.
2. Lowering Transaction Amount Thresholds#
On the Bitcoin main chain, micropayments often become impractical because transaction fees exceed the transaction amount itself. The emergence of the Lightning Network can completely change this situation, making micropayments as low as a few satoshis (1 BTC = 100 million satoshis) possible. This not only meets the urgent demand for daily small payments in Bitcoin but also opens up vast opportunities for innovative business models and new application scenarios.
3. Reducing Transaction Fees#
The block space of Bitcoin is a scarce digital resource, with each block accommodating only about 4,000 transactions. This scarcity forces users to bid for limited block space to ensure their transactions are timely included in blocks. Miners, as the “gatekeepers” of this system, naturally tend to prioritize transactions that are willing to pay higher fees.
When network transaction volume is low, users can set lower fees, and their transactions still have a chance to be included in the next block. However, when network activity surges and many users initiate transactions simultaneously, fees will rise accordingly, forming a dynamic market equilibrium.
Currently, the average transaction fee on the Bitcoin network hovers around $1. This figure may seem low, but during the peak market period this year, the fee for a single transaction once soared to an astonishing $125. For large transactions involving tens of thousands of dollars, such fees may still be acceptable. However, for everyday small payments, such as buying a cup of coffee, such high fees seem particularly unreasonable. Traditional payment giants like Visa typically charge a fee of 2% to 3% per transaction, while using the Lightning Network, a $100 transaction fee often does not exceed 1 cent, greatly reducing transaction costs and making micropayments and frequent small transactions economically viable.
*Image: Transaction fees on the Bitcoin network; Source: *https://bitinfocharts.com/zh/comparison/bitcoin-transactionfees.html#3y
Lightning Network: The Cornerstone of P2P Economy#
The Lightning Network significantly reduces the burden on the Bitcoin network, making transactions faster and cheaper, but the importance of the Lightning Network lies not only in its ability to help Bitcoin solve the “slow and expensive” problem but also in its unparalleled advantages in the field of crypto payments, serving as the foundation for our realization of a P2P economy and an important component of the Web5 world we envision.
The so-called P2P economy refers to the ability of people to conduct transactions autonomously in a peer-to-peer manner, where the role of the blockchain consensus layer is to facilitate and coordinate the formation and settlement of transactions, rather than taking over their execution. In a P2P economy, many business processes do not need to rely on the consensus layer but can be resolved directly at the P2P network layer.
Building the payment infrastructure for a P2P economy requires four key characteristics: high throughput, low latency, low cost, and privacy protection. The Lightning Network excels in all four areas and is the best way to achieve crypto payments:
- High Throughput: The TPS of the Lightning Network theoretically has no upper limit. Currently, the TPS of the Bitcoin Lightning Network has reached an astonishing 24.31 million, and with the continuous increase of nodes and channels, this number still has significant room for growth.
- Low Latency: Transactions on the Lightning Network are almost instant, requiring no waiting for block confirmations.
- Low Cost: Transaction fees on the Lightning Network are extremely low, even approaching zero.
- Privacy Protection: Transactions on the Lightning Network are not directly recorded on the blockchain, interacting with the main chain only when opening and closing channels, which enhances user transaction privacy to some extent. It is worth mentioning that the Lightning Network Fiber Network launched by Nervos CKB will later introduce PTLC (Point Time Lock Contracts) based on HTLC (Hash Time Lock Contracts), implementing different secret values for each hop in the path, further enhancing transaction privacy.
Although the Lightning Network has gained more attention and application since El Salvador adopted Bitcoin as legal tender in 2021, it has yet to achieve true large-scale adoption. One of the main reasons is that the primary currency circulating in the Bitcoin Lightning Network is BTC, and one of the biggest challenges facing BTC as a medium of exchange is its price volatility. Over the past two years, the funding capacity in the Bitcoin Lightning Network has grown slowly, and the number of channels has even declined.
*Image: The number of channels and funding capacity in the Lightning Network; Source: *https://mempool.space/graphs/lightning/capacity#all
To drive the continued development of the Lightning Network and accelerate its large-scale adoption, a key step is to enable the Lightning Network to support stablecoins. To this end, the Bitcoin community has already begun to take action: Lightning Labs is attempting to enable the Lightning Network client LND to support stablecoins based on Taproot Assets; the Lightning Network Fiber Network launched by Nervos CKB inherently supports user-defined assets, including Bitcoin-native stablecoins minted by protocols such as Stable++.
We have reason to believe that combining stablecoins with the Lightning Network will unleash powerful synergies, not only enabling widespread P2P financial services and applications but also promoting the widespread use and adoption of crypto payments in daily life, paving the way for the future of the crypto economy.
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