Interpreting the Lightning Network: Exploring the Past and Present of Bitcoin Payment Channels
The Lightning Network to Bitcoin is like Visa to currency.Author: Twitter@EvieEvieXia, BinaryDAO
Editor: Twitter@binary_dao, BinaryDAO
Research Overview:
When Satoshi Nakamoto created Bitcoin in 2009, he had the idea of payment channels and included a draft of the payment channel code in Bitcoin 1.0. In the following years, the implementation of payment channels and the Lightning Network has been driven forward by the geeks in the Bitcoin community, striving to realize the original intention of Bitcoin—building a peer-to-peer electronic cash system, even though it is a difficult and distant road.
Twitter founder Jack stated that integrating the Lightning Network into Twitter or BlueSky is just a matter of time, and announced in 2021 that Twitter could support third-party Lightning Network tipping services. The recent popularity of the decentralized social application Damus, which has built-in Bitcoin Lightning Network payment functionality, has once again sparked interest in the Lightning Network.
The Lightning Network conducts transaction processes off-chain, with only the final transaction results confirmed on-chain, thereby improving the transaction efficiency of the Bitcoin network and allowing users to complete payments at lower costs and faster speeds.
Use cases for the Lightning Network include tipping on social platforms, cross-border remittances, merchant payments, and transfer transactions, meeting diverse payment scenario needs.
After El Salvador adopted Bitcoin as legal tender in 2021, the number and amount of payments via the Lightning Network rapidly increased. As of February 8, 2023, the Lightning Network had a total of 16,000 nodes, nearly 77,000 payment channels, and channel funds amounting to approximately 5,356 Bitcoins (about 124 million USD).
In 2022, there were several large financings in the Lightning Network space, with top institutions including a16z and Paradigm participating in related project investments.
Of course, there are still many challenges on the road to the widespread adoption of the Lightning Network, such as how to get users to accept cryptocurrency payments psychologically and behaviorally, and how to build a vast payment network based on users. There is still a long way to go. However, it is relatively optimistic that the Lightning Network already has many real and effective use cases. With the continuous maturation of technology and the enrichment of use cases, perhaps one day, the Lightning Network will be to Bitcoin what Visa is to currency.
I. What is the Lightning Network
The Lightning Network is a Layer 2 solution for Bitcoin that helps users save costs and improve efficiency in Bitcoin payment scenarios.
- Development History
The earliest concept of the Lightning Network was called "payment channels," designed to update the status of unconfirmed transactions using a transaction replacement method until they are broadcast to the Bitcoin network. When Satoshi Nakamoto created Bitcoin in 2009, he had the idea of payment channels and included a draft of the payment channel code in Bitcoin 1.0, allowing users to update transactions before they are confirmed by the network. In 2013, Mike Hearn further elaborated on Satoshi's ideas about payment channels in the Bitcoin development mailing list.
In the following years, related solutions emerged, but none had a significant impact. Until February 2015, a white paper titled "The Bitcoin Lightning Network: Scalable Off-Chain Instant Payment," written by Joseph Poon and Thaddeus Dryja, was published. Thus, the Lightning Network was born.
Payment channel mesh routing of the Lightning Network
In December 2015, Gregory Maxwell proposed an expansion roadmap in the Bitcoin developer mailing list, prominently including the Lightning Network. This roadmap received support from most of the Bitcoin technical community and was implemented in the Bitcoin Core project. This sparked excitement for the Lightning Network. Subsequently, enthusiastic developers built the protocol stack for the Lightning Network—BOLT. Based on this standard, the Lightning Network can be compatible with Bitcoin, Litecoin, or other Bitcoin-like tokens.
In March 2018, Lightning Labs released a beta version of the Lightning Network implementation, which could support early users, marking a milestone in the development of the Lightning Network. At the same time, Lightning Labs announced it had raised $2.5 million in seed funding, with investors including Twitter founder Jack Dorsey. Following this, protocols and applications related to the Lightning Network gradually became richer, such as the enhanced version of the BOLT protocol—OmniBOLT, and payment platforms like Cash APP and Strike that support Bitcoin Lightning Network payments. After the launch of Damus, the Lightning Network once again achieved a new breakthrough…
- Implementation Method
The core idea of the Lightning Network is not complex; it conducts transaction processes off-chain, with only the final transaction results confirmed on-chain, thereby improving the transaction efficiency of the existing Bitcoin network. Its operation is as follows:
The two parties to a transaction establish an off-chain payment channel during the first transaction, which is essentially a shared ledger held by both parties to record transaction history. The parties lock a certain amount of funds in the channel and then sign transactions using private keys.
Operational logic of the Lightning Network
Source: https://www.youtube.com/watch?v=FOT6NqaEtfc
The transfer of funds between the two parties does not occur on-chain but is only stored on each other's ledgers. When one or both parties decide they no longer need the channel, the settled balance is then broadcast on the main network.
Operational logic of the Lightning Network
Source: https://www.youtube.com/watch?v=FOT6NqaEtfc
However, the Lightning Network is not just a direct connection between two parties; it can connect many single channels together to form a vast interconnected payment network (as shown below). In other words, suppose C and A have a channel, C and B do not have a channel, but A and B have a channel, then C can indirectly transact with B through A, and A, as the intermediary, can charge routing fees. In the Lightning Network, the network finds the path with the fewest nodes and the lowest transaction fees to complete the transaction.
Operational logic of the Lightning Network
Source: https://www.youtube.com/watch?v=FOT6NqaEtfc
II. Why Do We Need the Lightning Network
- Improve Transaction Speed
The Bitcoin network can currently execute a maximum of 7 transactions per second. Increased network usage may lead to delayed transaction confirmations, which is detrimental to the user payment experience, while Visa can execute thousands of transactions per second. Since Lightning Network payments are conducted off-chain within channels, requiring only smart contracts to execute without needing full network confirmation, this greatly enhances processing efficiency. Theoretically, the Lightning Network can achieve transaction volumes in the millions per second.
Comparison of TPS advantages of the Lightning Network (Source: Blockstream)
- Lower Transaction Amount Threshold
The Lightning Network can use the smallest unit of Bitcoin, "Satoshi" (1 Bitcoin = 100 million Satoshis), to facilitate payments, meeting the needs for small daily transactions.
- Reduce Transaction Fees
Bitcoin block space is a scarce resource, requiring users to bid against each other to ensure their transactions are included in the block space in a timely manner. Miners will prioritize transactions with higher fees. If there are not many users making transactions, fees can be set very low, allowing transactions to be included in the next block. However, if many users are transacting simultaneously, it can lead to a significant increase in fees. Currently, Bitcoin transaction fees are around $1.50, while during the market peak in 2021, they exceeded $60 (as shown below). For transactions worth thousands of dollars, this fee is acceptable, but for everyday small payments, such as buying coffee, it becomes unfeasible when adding the fee. Visa and Mastercard charge 2% to 3% per transaction, while using the Lightning Network, a $100 transaction fee will not exceed 1 cent. By significantly reducing transaction fees, the Lightning Network makes using Bitcoin for everyday payments economically viable.
Bitcoin transaction fees
Data Source: https://bitinfocharts.com/zh/comparison/bitcoin-transactionfees.html#3y
III. What is the Current Status of the Lightning Network
- Data Performance
After El Salvador adopted Bitcoin as legal tender in 2021, the Lightning Network saw more applications, and the amount of BTC in channels grew rapidly (as shown below). As of February 8, 2023, the Lightning Network had a total of 16,000 nodes, nearly 77,000 payment channels, and channel funds amounting to approximately 5,356 Bitcoins (about 124 million USD).
Amount of BTC in the Lightning Network
Data Source: https://river.com/learn/files/river-lightning-report.pdf
The concentration of Lightning Network channels is mainly in the United States, Canada, and Germany. The number of channels in the United States accounts for 30.15%, while in Asia, Singapore has a relatively high proportion of channels (1.644%). Due to the minimal use of the Lightning Network in Asia, there is a significant gap in understanding between the East and West regarding the Lightning Network.
Global nodes and channels of the Lightning Network
Image Source: https://explorer.acinq.co/
- Use Cases
With the gradual maturation of technology, payment and social giants are promoting the widespread adoption of the Lightning Network. Current use cases for the Lightning Network include:
Social platform tipping: The recently popular Damus supports Lightning Network payments and tipping features, allowing users to choose from dozens of wallets such as Strike, Cash App, and Blue Wallet.
Cross-border remittances: Digital payment platform Strike announced in January 2023 a partnership with Send Globally, enabling users in the U.S. and the Philippines to make fast, secure, and low-cost remittances via the Lightning Network. Through Send Globally, USD can be converted to Bitcoin, sent via the Lightning Network to a third-party partner in the recipient's country, then converted to local currency and sent directly to the recipient's account.
Merchant payments: Strike has partnered with Shopify, Blackhawk Network, and NCR to establish a Bitcoin payment system that allows merchants to quickly receive USD after customers pay with cryptocurrency. Merchants currently supporting this payment system include McDonald's, CVS, Walgreens, Whole Foods, and Walmart.
Transfer transactions: Cash APP, a payment platform under Block led by Jack Dorsey, supports sending and receiving Bitcoin via the Lightning Network.
- Ease of Use
For ordinary users, payments and top-ups can be easily completed through wallets that support the Lightning Network. Taking the commonly used non-custodial wallet Phoenix as an example, it can automatically create payment channels for users. When creating a channel, Phoenix charges a fee of 1% and about 3,000 Satoshis, but using existing channels for payments is free. Additionally, it has deposit and withdrawal functions, allowing users to seamlessly send and receive on-chain transactions. Besides Phoenix, other applications that currently support Lightning Network payments include Blue Wallet, Muun, Strike, and Cash App, which have also been continuously optimized and iterated in recent years, greatly lowering the barrier for users to use the Lightning Network.
Payment methods supporting the Lightning Network
Image Source: file:///Users/xiayiwei/Downloads/the-state-of-lightning-volume-2.pdf
- Investment and Financing
In 2022, there were several large financings in the Lightning Network space, with top institutions including a16z and Paradigm participating in related project investments:
In April 2022, Lightning Labs, a company focused on Bitcoin business, completed a $70 million Series B funding round, led by Valor Equity Partners.
In May 2022, Lightspark, a Bitcoin Lightning Network company founded by Meta's cryptocurrency head David Marcus, completed a funding round led by a16z and Paradigm.
In September 2022, Strike, a crypto payment application based on the Bitcoin Lightning Network, announced the completion of an $80 million Series B funding round.
IV. Issues in the Development of the Lightning Network
Regarding the shortcomings of the Lightning Network, some opinions online suggest that its node operation may lead to centralization, and routing may encounter liquidity issues when channel capacity is high. However, the Lightning Network is still in a very early stage, and it is entirely normal for some problems and shortcomings to arise. The relevant infrastructure and ecosystem are also being improved. As long as the Lightning Network is valuable and meaningful, and there is real user demand, we can afford to be patient with it. Of course, from the perspective of the Lightning Network's popularization, user education is indeed a significant challenge. How to get users to accept cryptocurrency payments psychologically and behaviorally, and how to build a vast payment network based on users, still has a long way to go.
V. How Will the Development of the Lightning Network Progress
Overall, the Lightning Network has opened up a new path for Bitcoin to be used for everyday payments and is striving to realize Bitcoin's original intention of being a "peer-to-peer electronic cash system." From the idea's proposal to its official implementation in 2018, the Lightning Network has been moving forward amid difficulties and is still in its early stages. However, it is relatively optimistic that the Lightning Network has developed rapidly since 2021, gradually forming consensus among user groups and expanding real and effective use cases.
As a decentralized social application, Damus supports the Lightning Network, allowing users to make payments and tips within the app, which may effectively cultivate users' habits of using Bitcoin for small payments. Additionally, Strike, Lightning Labs, and others are continuously promoting the development of the Lightning Network. Perhaps one day, the Lightning Network will be to Bitcoin what Visa is to currency.
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References:
The State of Lightning
file:///Users/xiayiwei/Downloads/the-state-of-lightning-volume-2%20(1).pdf
Insights From the 4th Largest Lightning Network Node
https://river.com/learn/files/river-lightning-report.pdf
What is the Bitcoin Lightning Network Tipping Supported by Nostr, and How to Use It for Small Payments?
https://www.theblockbeats.info/news/34244
Lightning Network - History and Reality
https://mirror.xyz/bitcrab.eth/T3gIfKepjfs3YUiRWTgCTqS6gc8LaC5z7lYKQY-HLEE
The History of the Lightning Network: From Brainstorming to Beta Version
https://www.btcstudy.org/2020/09/03/history-lightning-brainstorm-beta/#%E9%97%AA%E7%94%B5%E7%BD%91%E7%BB%9C
Bitcoin Breaks the 5,000 BTC Milestone, Lightning Network May Be Severely Undervalued
https://news.marsbit.co/20221014134404738571.html
What is the Bitcoin Lightning Network?
https://www.youtube.com/watch?v=FOT6NqaEtfc
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