Lightning Network Payment Technology Benefits – Bitcoin Magazine
This is an opinion editorial by Yuya Ogawa, a software engineer and co-host of the Diamond Hands community.
This article is based on the content of the “Understanding Lightning” report produced by the Diamond Hands community, the largest Lightning Network community in Japan. The report aims to provide an overview of Lightning’s technology and ecosystem for a non-technical audience.
What’s so special about the Lightning Network?
Bitcoin was brought into this world over a decade ago to enable peer-to-peer payments without the need for a trusted third party. To maintain this censorship resistance, Bitcoin limits its throughput to 1M vByte per block, every 10 minutes, making it easy for anyone to run their own node.
The Lightning Network is Layer 2 technology built on top of the Bitcoin blockchain, enabling faster and cheaper payments, massively improved scalability and better privacy without compromising censorship resistance and decentralization. In this article, we’ll relegate the tech specs to another day, instead focusing on Lightning’s censorship resistance and scalability capabilities.
Decentralized and censorship resistant
Just like Bitcoin, Lightning users can run their own nodes and manage their own payment channels. This is in stark contrast to the vast majority of emerging Layer 2 technologies in the wider crypto ecosystem.
For example, Ethereum rollups exist on-chain as a single smart contract on-chain that stores the state of all users – as opposed to thousands of different payment channels in Lightning’s case. For Ethereum, an operator node is responsible for managing and updating this state, thus introducing a vector for censorship or exploitation. Although Ethereum and Solana were sufficiently decentralized and censorship-resistant networks, Layer 2 users could be affected if the smart contract or operator node is censored or exploited.
In Lightning, each user creates payment channels to create a massive web of payments. Even if a user is censored or exploited, the rest of the network remains functional. While there are valid concerns regarding the emergence of large nodes (popular nodes that attract many payment channels) and their vulnerability to censorship, even in such a case, users are free to create alternative payment channels to bypass these nodes, if necessary. This censorship-resistant dynamic, enabled by Lightning’s decentralization, is unmatched by most other Layer 2 technologies.
Massively scalable
Payments on Lightning typically go through multiple payment channels to reach their destination. Typically, we see payments that are routed over no more than four or five hops (routing nodes). Assuming each jump takes one second, the payment is completed in four to five seconds. If the payment requires zero hops, i.e. if you share a payment channel with the destination, it will likely settle in a fraction of a second.
Fees are typically around 0.1% of the payment amount, so a $1 payment will likely cost 0.1 cents in fees. For zero-hop payments there is no fee. The throughput of each node is limited, with Lightning Network Daemon (LND) benchmark results suggesting that a node can process 50 transactions per second (tps) out of the box (see details here). However, as mentioned in the report, software optimizations should be able to bring this number to 1000 tps. Also, since the network can process payments in parallel, if 1,000 pairs of nodes across the network all operate at 1,000 tps, the network as a whole is doing 1,000,000 tps.
Routing nodes, at your service!
Just as miners are incentivized by transaction fees and newly minted coins in proof-of-work mining, the nodes that forward payments across Lightning are incentivized by routing fees. A competitive market for hashing adds security to the Bitcoin blockchain; a competitive payment routing market results in cheaper and more reliable payments on Lightning.
Since routing nodes earn a fee every time they forward a payment, they naturally aim to route as much value as possible. However, mispricing liquidity can lead to unbalanced channel capacity and routing errors – which benefits no one, including the routing nodes involved. To maximize revenue, routing nodes attempt to balance their channels, improving payment success rates and settlement times across the network. More routing nodes also mean more possible routes that can be used as alternatives, improving network reliability.
Summary
The Lightning Network is highly decentralized and censorship resistant thanks to its reliance on the Bitcoin blockchain where users can freely create new payment channels. Furthermore, similar to how a competitive mining market results in Layer 1 security, routing nodes compete with each other to provide stable and competitively priced payment forwarding on Lightning. Bitcoin enables trustless payments as envisioned by Satoshi Nakamoto over 10 years ago, and the Lightning Network is an attempt to significantly improve scalability without compromising these fundamental values.
This is a guest post by Yuya Ogawa. Opinions expressed are entirely their own and do not necessarily reflect the opinions of BTC Inc. or Bitcoin Magazine.