Is Bitcoin’s Lightning Network Adoption at Risk – Liquidity and Risk Issues Abound

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Over the past five years, the Lightning Network has emerged as the technology solution to the problem of Bitcoin scalability.

However, development has been slow and faced significant obstacles such as lack of liquidity and potential risk.

Tackling these obstacles will require a collaboration between centralized and decentralized solutions, paving the way for wider Lightning Network adoption and increased Bitcoin usage.

I see these problems with the Lightning Network clearly – but first, let’s take a look at the numbers.

Lightning network – pstatistics

For now, the Lightning Network protocol has over 16,000 nodes, with a total of 75,647 payment channels. Since 2020, the number of nodes has increased by 240%.

The current network capacity is over 5400 BTC, with an average node capacity of 0.333 BTC.

According to a recent study, the majority of nodes are located in developed countries. Germany, Canada and the Netherlands have almost 10,000 nodes between them, while about half of all existing nodes are based in the US.

Lightning Network apps (LApps) or LN wallets provide access to off-chain transaction channels. There are currently over 70 LApps or wallets on the market.

Exploring the risks

Although LN’s popularity and adoption is increasing, it has some risks that users may not be aware of.

First, LN channels are fundamentally anonymous and decentralized, meaning that responsibility is shared solely by the parties involved.

This creates a massive concern in case one of the parties turns out to be a bad actor (eg when both parties are in the payment channel, one can close the channel and withdraw the money while the other party is offline).

Second, since all transactions are recorded off-chain except for the final settlement, all funds can be lost if a participant closes the channel. This problem goes against the basic principle of blockchain technology, which is to ensure transparency.

Third, there is the risk of malicious cyber attacks that can disrupt transactions and increase network congestion.

A report from Florida International University showed that malicious bots could be configured to attack Lightning Network channel servers.

By breaching the network, they can create multiple channels and close them simultaneously, resulting in massive congestion and providing a window of opportunity for hackers to steal funds from their targets.

And fourthly, there is the risk of the counterparty defaulting. If one of the participants does not have enough funds to cover their balance, the transaction will fail and the funds will be lost.

How operators can improve the Lightning Network

These risks and concerns hold back the broader potential of LN. The first step to securing the network is to improve user knowledge and experience – for example by making LN channels easy to set up and use.

Great emphasis should also be placed on improving node quality. Many operators manage their nodes through special advanced software ecosystems, but they need to balance their channels correctly.

This reduces network speed, slows down transactions and destroys LN’s basic use case.

And finally, what LN can use is an inexpensive plug-and-play device that users can simply plug into a power outlet and easily set up, so that it will automatically optimize all network configurations and node performance.

On the road to adoption

Overall, the Lightning Network was created as a solution to the scalability issues of the Bitcoin network, making transactions faster, cheaper and more efficient.

However, these benefits will not be widely received if the current risk and liquidity problems continue to exist.

Therefore, operators and developers must improve the user experience and security features of LN platforms going forward and introduce effective solutions to LN if they were to increase its use in other regions.

Ultimately, we see a correlation between the rise of layer two solutions and transaction fees in layer one.

This trend is particularly evident in Ethereum, where the increase in average gas prices from 2020 to 2022 prompted many developers to explore layer two solutions. This resulted in the emergence of new layer two scaling solutions.

However, the transaction fees on the Bitcoin network are not as significant, which leads most users to trust the original layer.

That is why it is crucial to solve the internal problems of the sector to capture potential users and be the best market-fit solution if transaction fees for the network rise.

Slava Demchuk is a co-founder of AMLBot, CEO of PureFi and founder of AMLSafe, companies specializing in crypto AML/KYC compliance and security. Slava is an experienced manager, visionary and C-level AML specialist, certified by EIMF (European Institute of Management and Finance).

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