How do they stack up?

by · August 24, 2022

Bitcoin (BTC) changed the world as a decentralized and non-governmental form of currency that could facilitate peer-to-peer (P2P) transactions that transcend national borders.

However, despite this functionality, Bitcoin’s role as a payment mechanism has been questioned due to its low transaction throughput.

The Bitcoin blockchain can handle up to seven transactions per second, meaning network demand has seen the average transaction fee on the network reach an all-time high of over $62 in certain periods.

To address low throughput and high transaction fees, developers created the Lightning Network – a layer-2 scaling solution that allows off-chain transactions.

The Lightning Network creates a P2P payment channel between two parties in a transaction. The channel “allows them to send an unlimited number of transactions that are almost instant as well as inexpensive. It acts as its own little ledger for users to pay for even smaller goods and services like coffee without affecting the Bitcoin network.”

Users of the network lock in a certain amount of Bitcoin to create a channel. Once the BTC is locked, the recipients can bill amounts as needed.

To some extent, the network is seen as a solution to Bitcoin’s scalability problem, but adoption has been somewhat slow. The network currently has 87,000 payment channels and 4,570 BTC worth over $111 million locked up, compared to 19.1 million BTC in circulation, whose market cap is over $460 billion.

Despite its slow adoption, the network has the potential to outperform existing payment solutions.

Lightning Network’s transaction throughput

Payment giants such as Visa and Mastercard are used to process payments worldwide. Mastercard’s network is estimated to process up to 5,000 transactions per second, making it far superior to Bitcoin’s seven per second.

Visa’s transaction throughput is even more impressive, processing up to 24,000 transactions per second. In a recent interview, Visa CFO Vasant Prabhu said the network could theoretically handle up to 65,000 transactions per second.

However, the Lightning Network goes much further, processing up to one million transactions per second, making it the most efficient payment system in the world in terms of transaction throughput.

Cointelegraph reporter Joseph Hall does an impromptu test of the Lightning Network versus fiat contactless payments.

Speaking to Cointelegraph, Ovidiu Chirodea, CEO of the Romanian cryptocurrency exchange Coinzix, noted that the network marks the next phase in the evolution of money. Per Chirodea, first there was gold, which was a store of value but not a practical medium of exchange, with fiat currency as a practical medium of exchange.

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Bitcoin, Chirodea said, was an evolutionary step that created a new store of value, with the Lightning Network as a platform for it to also become a medium of exchange:

“Visa charges businesses around 3% to process payments, so I think the Lighting Network is a game changer. Businesses will increase their revenue by using it, and that’s not something you can ignore.”

However, he noted that the network’s scalability “is not that great”, as users have to open a channel with each party and tie up BTC on it, which affects their liquidity. In his words, tying up liquidity can be avoided “by using other routes and other payment channels”, but the solution “is not very scalable as payment channels keep opening and closing.”

Thomas Perfumo, head of business operations and strategy at crypto exchange Kraken, told Cointelegraph that since the firm launched Lightning Network support in April 2022, it has “steadily increased its network capacity” to the point that it is now the fifth largest node on Lightning. Network:

“We currently have over 800 open channels that can facilitate payments worth 18 billion satoshis. Customers routinely fund their accounts via the Lightning Network on a daily basis.”

Perfumo added that the exchange sees the Lightning Network as “essential to creating a permissionless payment system that will ultimately help accelerate the adoption of cryptocurrencies worldwide.”

While the Lightning Network’s advantages in terms of transaction throughput are now clear, it has some notable disadvantages.

First, opening a Lightning wallet and funding it may not be as easy or as ingrained as opening a bank account and using a debit card.

Furthermore, funding a Lightning Network wallet requires users to send BTC from a traditional Bitcoin wallet, and creating a payment channel involves unlocking funds.

Once funds are locked to a payment channel, they are free to transact, but can only be recovered after that channel is closed. Also, offline transaction fraud is possible, as one party can close a channel when the other is offline to try to steal money. Although third-party services can reduce the risk, it prevents anyone from entering the network.

Privacy, ease of use and resistance to censorship

With these drawbacks in mind, Max Rothman, head of crypto and digital assets at global payment processor Checkout.com, told Cointelegraph that being able to use cryptocurrencies to exchange goods and services “is only effective when crypto can seamlessly exchange hands.”

The Lightning Network is peer-to-peer, Rothman added, placing responsibility for the transaction process on both merchants and customers. At an institutional level, “this can be challenging and resource-intensive to manage internally without a trusted partner to manage thousands or millions of cross-currency transactions.”

Rothman said solutions like the one used by Checkout.com, which relies on partner companies like Visa to provide on-ramps that allow crypto-to-fiat conversions, are the “bridge that offers a more seamless translation experience between Web2 and Web3 .”

Bringing the next million or billion people into crypto “requires guidance, support and tailored solutions that work for all levels of payment needs and recognize the current payments environment in which we operate,” he said.

Bruce Fenton, a board member at the Bitcoin Foundation and candidate for US Senate in New Hampshire, told Cointelegraph that the Lightning Network “enables Bitcoin to do more transactions” while being “more decentralized and censorship-resistant than centralized companies”. or most other chains.”

When asked about the pros and cons of using the Lightning Network over solutions from companies like Visa, Fenton dismissed Visa as “completely centralized,” meaning it could be “stopped or censored.” While centralization may be a concern on the Lightning Network for some, he said it does not affect the Bitcoin blockchain itself, adding:

“It’s mostly about which money you build on and for. For those who believe in Bitcoin as the superior money, LN is the best-known scaling solution.”

Chad Barraford, CTO at decentralized liquidity protocol THORChain, told Cointelegraph that when checking out at online stores, the Lightning Network enables a “cash” option, where “there are no other parties involved, no exorbitant fees and significant privacy benefits.”

He said the network “is not solely motivated by the interests of shareholders or directors”, but serves the interests of participants as a public good, adding:

“Visa is a financial institution that inherently seeks profit, control and is at the behest of government. The Lightning Network is a pure public good. It exists only to provide a basic and critical service for every person on the planet who needs access to financial services.”

The Lightning Network’s adoption and success is “tightly linked to the Bitcoin network itself,” Barraford stated. He believes that as the world sees BTC less as a speculative asset and more “as a currency to buy goods,” inflationary pressures will “push more and more people to the Lightning Network.”

Although the comparison with networks such as Visa or Mastercard is clear from these answers, it is worth pointing out that some of these arguments apply to other solutions such as PayPal, which may be forced to freeze customers’ assets or charge higher fees, for example.

Blockchain technology has evolved over time to the point that other blockchains are also able to compete with Visa’s transaction throughput without seeking to profit from it.

What about other chains?

Speaking to Cointelegraph, Fenton suggested that the Lightning Network stands out as “more decentralized and censorship-resistant” than most other blockchains.

Declare co-founder and project manager Jake Yocom-Piatt built on that idea, telling Cointelegraph that other blockchains are unable to match Lightning Network’s qualities.

Yocom-Piatt claimed that high-throughput blockchain Solana, with a theoretical throughput of 710,000 transactions per second, is a “centralized non-custodial blockchain that requires the validation nodes to run in data centers on advanced hardware.” Comparing Bitcoin, Solana and Decred himself, he said:

“Of the three, the Lightning Network is the most decentralized, sovereign, and most in line with the original ethos of the cryptocurrency space. Solana sacrifices most of its decentralization via its onerous validation node requirements, but at least it doesn’t appear to be capable of censorship users and sellers arbitrarily.”

Whatever the future holds, it is clear that innovation in cryptocurrency is increasing transaction throughput. Whether users will end up choosing to sacrifice privacy and immutability for more convenience remains to be seen.

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As it stands, more practical solutions are available. It is now easier to use layer-1 blockchains for payments via centralized devices that allow crypto-assets to be converted to fiat currencies at the point of sale.

For the Lightning Network to gain a wider audience, more services will likely need to support it. Leading exchanges such as Coinbase, Binance and FTX have not followed in the footsteps of other exchanges in embracing the network, hindering its growth. Since the network relies on having multiple payment channels to continue routing transactions, other networks and centralized payment providers are likely to be at the forefront.