As the popularity of Bitcoin grows, more and more transactions have to be processed by this network. According to Coinmarketrate.com we know that blockchain technology is a technology in which the database is shared by all nodes. This has its advantages for some things, and not so much for others.
When transactions are made inside the Bitcoin blockchain, they are called intra-chain. This has advantages for the people involved in them, as it prevents future problems or disputes that may arise in the future, and also prevents fraud.
For example, if someone changes the transaction information on one of the Bitcoin nodes, it can be easily detected, since others will have copies of the original information.
Bitcoin Scalability Problem
However, having such a large backup, meaning that all participants have a copy of all transactions made, poses scalability problems for this network.
In a system like Bitcoin, mining nodes are responsible for including new transactions in the network blocks. This means that with an increase in the volume of transactions, commissions increase dramatically.
As a result, Bitcoin has not been able to scale well to cope with the new influx of people willing to send their BTC. The network is not able to process more transactions at the same time.
If Bitcoin wants to move to the next level where it can process more information and conduct more transactions per second, then it needs to develop a technology that will do all this quickly and efficiently.
This problem affects not only how much a person pays for sending a VTS over the network, but also that their processing takes longer.
This was the purpose of the Lightning Network’s appearance – to create a solution that can scale so that users can use Bitcoin as a medium of exchange.
How does the network solve this problem? In a nutshell, the Lightning Network allows people to send messages to each other with virtually no fees and immediately.
To do this, payment channels are created between two users so that they can send values to each other. Basically, they make transactions off-chain. This is because the network is an additional layer of the Bitcoin blockchain, so not all transactions between these two people need to be reflected in the blockchain.
But not only does it allow two people to send money to each other, it also makes it possible for all participants in this network to connect. Thus, money can be sent cheaply and almost instantly to anyone who participates in them.
Disadvantages of the network
However, despite the fact that this idea has been called revolutionary and put an end to the scalability problems of Bitcoin, there are some shortcomings that need to be addressed.
The issue of fees for Bitcoin is of great concern, and the Lightning Network is often cited as a solution to the difficulties it faces.
Not only because people could avoid paying fees on the blockchain by doing so here, but also because they would avoid overloading the Bitcoin network. This may lead to a decrease in fees charged on the blockchain, or at least not too much increase in them.
Although congestion is only one of the factors affecting transaction costs. In addition to the fact that you need to pay at least a couple to use the Lightning Network.
- Costs of opening and closing the channel
First of all, two commissions are required for the operation of the payment channel. The first is used to open the channel itself, and the second is used to close it.
In addition, when the channel is closed unilaterally, a third fee may be charged. The network allows you to make it so that if one person tries to deceive another, the other party can close the channel without cooperation. The problem is that this generates a third transaction in the Bitcoin blockchain and therefore an additional fee.
As long as both parties want to make transactions at the second level, fees will not be a problem. But if they then want to return to the main chain, they will have to pay more.
One theory is that in the future very few will decide to switch back to the blockchain, or that a kind of equilibrium will be established in which the fee will be high, but not so high that it will be convenient to do it from time to time. But to know for sure, we need to wait and see how all this will happen.
- Routing rates
In addition to the fees paid for opening and closing the channel, there are also fees paid for routing transactions.
It is true that the service fees here are very low, but there must be a balance between routing other people’s transactions and rejecting them. Anyone who has an open channel through which our transaction must pass to get to someone else can decide to do this if the fee is interesting, otherwise he will lose liquidity.
It is also true that there may be nodes offering this service for free, which creates competition for these nodes and reduces commissions to almost zero. An example would be a store that can have more liquidity and offer a route without high costs.
Permanent connection of the BTC to the Internet
To work, the Lightning Network nodes must remain connected at all times. They must be launched to sign transactions so that payments can be sent and received.
There is also a downside to this, which is that the private key is constantly on a device connected to the Internet, which creates certain security risks.
The good news is that we may have hardware wallets that will allow you to do all this without having to disclose the private key by signing a transaction on the device, similar to how it works today.
- Risks of being offline
But if our node disconnects from the network, there is another risk. We know that we can unilaterally close the channel, which gives one of the parties the opportunity to try to do this with the aim of stealing funds.
This is known as fraudulent channel disconnection. And while it’s not that serious, if for some reason a node goes offline for a few hours, it can be problematic if it’s offline for a long period of time.
- Malicious attacks
If an attacker creates multiple channels and closes them at the same time, which must be transferred to the blockchain, this will cause an overload of the Bitcoin block’s bandwidth. This can be used to steal funds from those who cannot close their accounts due to congestion.
This is not such a simple attack, but it can cause inconvenience in the future if a way is not found to limit this problem.
The main idea of the Lightning Network is to allow the use of BTC as a medium of exchange for everyday transactions. We can open communication channels with enterprises and pay for goods and services with all the advantages we discussed above.
However, the volatility of BTC is still a serious problem for wider distribution. Accepting money in this form can be a problem for the other party, since their value can greatly increase or decrease in a matter of days or weeks, even hours.
Bitcoin acceptance is good, but it’s also a double-edged sword, as it attracts more trading volume, which causes even more volatility.
Fortunately, there are technologies such as Strike or others under development that allow companies to immediately exchange BTC for fiat currency or stablecoins.
Of course, this is not an ideal option for those who want to stay in BTC forever, but it is a solution until it becomes stable enough to become a useful cryptocurrency for traders.
Although all these problems exist and greatly affect the adoption of Bitcoin and the Lightning Network, not everything is as negative as you might think. New features and solutions are constantly being developed that can largely solve these problems.
Lightning Network is still a great idea to solve one of the biggest problems of the BTC – its scalability.
It is still unclear whether it will be possible to solve some of the main problems that may hinder its implementation today. But with so many companies and important people working on this technology, it’s not hard to think positively about it.