Tech
Bitcoin’s Lightning Network: 3 Possible Problems
The Lightning Network is a second layer added to the Bitcoin network, which allows transactions between parties outside of the main blockchain, called off-chain transactions. The Lightning Network has often been touted as a turning point in the evolution of cryptocurrency. It is designed to speed up transaction processing times and reduce costs associated with the Bitcoin blockchain. The Lightning Network was conceived by two developers, Thaddeus Dryja and Joseph Poon in 2015.
While the Lightning Network has seen growth and development since its inception, challenges remain. Bitcoin’s price fluctuations have prevented the cryptocurrency from becoming a popular payment method for commercial and consumer transactions. Additionally, there are costs associated with using the Lightning Network.
Here we highlight what the Lightning Network is designed to solve and three problems it faces. Additionally, we look at recent developments that could impact and improve the network in the future.
Key points
- The Lightning Network is a second layer added to the Bitcoin network, which allows transactions to be made outside of the blockchain.
- The Lightning Network is designed to speed up transaction processing times and reduce costs associated with the Bitcoin blockchain.
- However, the Lightning Network still has associated costs and can be vulnerable to fraud or malicious attacks.
- Bitcoin’s price swings could prevent the cryptocurrency from becoming a popular payment method, limiting the use of the Lightning Network.
Understanding the Lightning Network
As Bitcoin gains transaction volume, more are processed on its blockchain network. This presents problems because the blockchain, in its current state, is not designed to scale or process the volume of transactions made.
The Bitcoin Scalability Problem
The blockchain and the Bitcoin network are designed to process a block approximately every 10 minutes. Transactions are sent to a work queue, where they are prioritized based on the amount paid by the user in fees. The more transactions there are, the bigger the queue.
As a result, Bitcoin faced a scalability problem, meaning there are challenges when the network tries to process multiple transactions at once. In order for Bitcoin to process more data, the network must expand, allowing more transactions to be processed faster and more efficiently.
This network latency has led to higher transaction fees as miners take longer to validate transactions because users pay more to prioritize them.
What it is designed for
The Lightning Network is a separate blockchain that works alongside the Bitcoin blockchain. Simply put, the Lightning Network allows participants to transfer bitcoins to each other much more quickly using payment channels. Channels can remain open for further payments or closed once a transaction is completed. Instead of waiting for the main network to complete the payment transfer work queue (sometimes taking more than an hour), Lightning Network allows users to send and receive payments in seconds.
1. It does not solve the problem of Bitcoin transaction fees
Lightning Network is often touted as a solution to the problem of Bitcoin’s growing transaction fees. Its supporters claimed that transaction fees, one of the direct consequences of Bitcoin’s clogged network, would decline after the technology removed transactions from the main blockchain.
But Bitcoin’s congestion is one of several factors that affect its transaction fees. When the Lightning Network was integrated in 2018, users expected lower costs and faster transactions, but as the chart below shows, average fees for Bitcoin transactions have increased. There could be many reasons for this, but it shows how ineffective the Lightning Network has been in reducing rates.
Blockchain.com
Lightning Network Fees
In addition to standard fees for on-chain transactions, users are charged a fee for opening a channel with a routing node. The routing node operator charges fees for providing the Lightning channel to the core network. The tariffs consist of a basic tariff and a tariff, both chosen by the operator. The base fee remains unchanged unless manually changed and the fee is a percentage of the transaction value.
Therefore, a node operator could set the base fee at one satoshi and the rate at 0.1%. If a user wanted to send 1,000 satoshis through this node, he or she would have to pay 2 satoshis to the node (fees on the Lightning Network can be measured in milli-satoshi increments, so the payments can actually be very small).
Lightning rates are generally low because hosting a node is a competitive business. Rates need to be low enough to attract users but high enough to provide some benefit to the host. If they are too low, there may be no reason to run a node; if they are too high, users will likely choose a lower priced node.
Interestingly (and regardless of node fees), by design, the Lightning Network incorporates fees to try to reduce overall fees.
2. Staying online at all times makes nodes vulnerable
Nodes on the Lightning Network must always be online to send and receive payments. Since the parties involved in the transaction must be online and use their private keys to log in, it is possible for coins to be stolen if the computer hosting the node is compromised.
Offline Transaction Risk
Going offline creates a variety of problems on the Lightning Network. According to Dryja, it is possible for one party to a payment channel to close the channel and pocket the funds while the other is absent. This is known as closing the fraudulent channel. There is a deadline for contesting the closure of a channel, but the prolonged absence of one of the parties could cause this deadline to expire.
Malicious attacks
Another risk to the network is congestion caused by a malicious attack. If payment channels become congested and a hack or malicious attack occurs, participants may not be able to recover their money quickly enough due to the congestion.
According to Dryja, “the forced expiration of many transactions may represent the greatest systemic risk when using Lightning Network.”
If an attacker created numerous channels and forced them to expire simultaneously by broadcasting them on the blockchain, the congestion caused could overwhelm the block’s capacity. An attacker could use congestion to steal funds from individuals who are unable to withdraw their funds due to congestion.
3. Bitcoin price fluctuations
The Lightning Network is also expected to herald the viability of Bitcoin as a medium for everyday transactions. Customers are able to open payment channels with companies or people they frequently transact with. For example, they can open payment channels with their landlord or favorite e-commerce store and make transactions using bitcoin.
However, Bitcoin has less popularity as a traditional payment method than as an investment tool. The increase in transaction volume is mainly attributed to an increase in trading volume. In other words, Bitcoin’s popularity among traders and investors increases volatility– or price fluctuations – as well as congesting the network and influencing tariff increases.
Recent Lightning Network Developments
Challenges remain related to Bitcoin’s Lightning Network and its ability to increase scale while reducing transaction fees. However, the core technology team incorporated new use cases and researched additional functionality. As a result, there have been significant developments attempting to improve the network.
Larger payments via Lightning Network
Lightning had initially limited channel size to a maximum of 0.1677 BTC, but in 2020 it was announced that the constraints would be removed so customers could have larger channels. These “Wumbo” channels are designed to increase usage and utility of Lightning Network for consumers and businesses.
Cryptocurrency exchanges
One of the most promising initial use cases involves cryptocurrency exchanges and financial services platforms. For example, Kraken and Block’s Cash App have integrated Lighting Network. In September 2023, Coinbase CEO Brian Armstrong announced that the exchange would integrate the Lightning Network. As one of the largest cryptocurrency exchanges, this represents a significant development for the network.
Watchtowers
Watchtowers are third parties that work to prevent fraud within the Lightning Network. For example, if Sam and Judy are making a transaction and one of them has malicious intent, they might be able to steal coins from the other participant by closing the channel.
So, let’s say Sam and Judy made an initial deposit of 10,000 BTC and a 3,000 BTC transaction took place where Sam purchased goods from Judy. If Judy logs out of the system, fraud may occur. Sam could pass on the initial state, meaning they both get their initial deposits back as if no transaction had taken place. In other words, Sam would receive 3,000 BTC worth of goods for free.
This process of closing the channel based on the initial state versus the final state in which all transactions were executed is called fraudulent channel closing. The watchtower monitors transactions and prevents fraudulent channel closures by enforcing the closure on the offending party. It transmits a revocation transaction and causes the other party to lose the channel balance.
Is the Lightning Network part of Bitcoin?
The Lightning Network is a layer 2 (a blockchain that assists a primary blockchain) to the Bitcoin blockchain. It was integrated with Bitcoin in 2018.
How do you use the Bitcoin Lightning network?
To complete transactions using the Bitcoin Lightning Network, you will need to use a Lightning-compatible wallet.
How fast is the Bitcoin Lightning network?
The Lightning Network can reportedly process millions of transactions per second. Bitcoin’s main blockchain can process about seven per second.
The bottom line
The Lightning Network is a tool that could make a significant difference to the Bitcoin blockchain. However, the network may not solve all the challenges facing Bitcoin. While improvements are being made, there is the potential for new problems within the cryptocurrency ecosystem because it remains an ever-evolving technology.
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