As a currency that can be used for cash, three basic conditions must be met. It should play the role of medium of exchange, means of value storage and unit of account. Bitcoin has not fully achieved all of these goals, which more or less explains why it has not been as widely adopted as many early supporters hoped.
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Bitcoin faces two main challenges. First, the speed of Bitcoin is too slow, and a transaction takes minutes or even days to be confirmed, which makes it not a satisfactory medium for transactions. Second, when network traffic is high, the cost of Bitcoin transfers will skyrocket. When Bitcoin price reached an all-time high in December 2017, the cost of a transaction could be as high as $ 55.
The Lightning Network was created as a solution to this problem. In 2015, developers Joseph Poon and Thaddeus Dryja first proposed the idea. It uses the concept of off-chain payment channels, enabling both parties to a transaction to send and receive bitcoins instantly to each other. Once both parties close the channel, the final balance will be broadcast to the Bitcoin network.
Since payments using this channel do not rely on broadcasting to the Bitcoin blockchain until the end, the Lightning Network is much faster than the Bitcoin network. Its transaction fees will only be paid upon final settlement when the channel is closed. Blockstream was the first company to start using the Lightning Network in 2018, and the number of teams working on different implementations of the network is already very large.
Is Lightning Network a flash in the pan?
In recent months, reports on the shortcomings of the Lightning Network have emerged, which have negatively affected the development of the Lightning Network. In February of this year, a team of scholars from multiple countries published an uncensored paper stating that the Lightning Network is becoming more and more centralized, with high Gini coefficients for node centralization and wealth distribution. The node distribution coefficient is 0.88, which is equivalent to 10% of the nodes controlling 80% of the lightning network.
A paper published by a research group in Hungary late last year explained this centralization, which was later mentioned by digital protection expert David Rosenthal on his blog. The study, called A Cryptoeconomic Traffic Analysis of Bitcoin's Lightning Network, found that the transaction cost of the Lightning Network is so low that it is economically unreasonable to operate a node. ". The study also points out that due to the small size of the network, privacy is another shortcoming of it, as people can easily infer the origin and destination of payments.
These ideas are interesting because they seem to raise the question of "chicken first or egg first". Node operators may be discouraged due to low transaction costs, thus losing the opportunity to make profits from Lightning Network. At the same time, if there are not enough node operators to operate the network, the user experience will not be enough to attract those who want to use it as a payment solution.
These figures have clearly stated the reason for the low adoption rate of Lightning Network. According to data from BitcoinVisuals, the cumulative capacity of all channels of the Lightning Network is currently about $ 8 million, or less than 1,000 BTC. Compared to Bitcoin's market value of about $ 165 billion, its circulation is less than 0.005% of Bitcoin.
According to data from DeFi Pulse, Bitcoin-backed ERC-20 token WBTC is now locked in smart contracts with a value comparable to the value of the Lightning Network.
In addition, the second layer of the Ethereum platform Matic Network announced on Twitter that it is working with the interoperability protocol RenVM to support BTC directly on the Matic sidechain. According to the statement, the new features will give Matic "similar capabilities to the Lightning Network." Matic co-founder and COO Sandeep Nailwal explained to Cointelegraph how interoperability protocols can make this feature go beyond Lightning Network in terms of single-chain solutions:
"Interoperable BTC will provide more features, use cases, and ways to use BTC, instead of only running on the Lightning Network and only making small payments. Making BTC available on the Ethereum virtual machine sidechain is not just payment and A great solution for integrating Defi use cases, but also offers the potential for innovation and integration with games and the wider DApp ecosystem on Ethereum. "
Starkware by Starkware is another payment solution that competes with Lightning Network. The project aims to overcome several challenges that hinder Lightning Network adoption, and the company's co-founder, president and board chairman Eli Ben Sasson told Cointelegraph:
"Lightning Network payment channels create inefficient capital because they require both parties forming the channel to lock in funds, not just the payer. Another issue is the requirement for activity, which forces all parties to constantly monitor when the channel is open Bitcoin blockchain. I think these two shortcomings are to explain why such systems are not widely used. "
Can Lightning Network shine?
This is not to say that the Lightning Network is doomed to fail, and its supporters are still many. Jack Dorsey, the founder of Twitter, is a notable example. He not only invested in Lightning Labs, but also introduced the reminder function of Lightning Network to his social platform.
Bitfinex has also been an advocate of Lightning Network, and the platform also announced support for Lightning Network last December. The cryptocurrency exchange also cooperates with Bitrefill to provide users with online shopping services and use the Lightning Channel to make payments with BTC. Roy Sheinfeld, co-founder of the lightning payment app Breez, told Cointelegraph that the network is doing a good job in terms of adoption, but just needs more time to develop:
"Lightning Network needs to be more mature before attracting mainstream users, but it has made great progress in a short period of time. In the past few months, we have witnessed the integration of Lightning Network with mobile applications such as Breez and Phoenix "Game solutions such as Zebede have also begun to emerge on the Lightning Network. We have also witnessed the development of the first fiat currency to Lightning Network access channel solutions such as Sparkswap and Escher."
Carlos Roldan, chief executive officer of Satoshi's Games, an 8-bit gaming network running on Lightning Network, agrees, saying in an interview with Cointelegraph:
"All active BTC users require solutions like Lightning Network to create liquidity for BTC and become a means of value storage. Otherwise, Bitcoin's on-chain transactions will cause inconvenience to daily users. Go to a coffee shop to buy a cup Coffee has to wait for 20 minutes, which will not happen on Lightning Network. "
Is there a demand for Bitcoin payment solutions?
People have different opinions on whether Bitcoin users need a payment solution. In fact, compared to the overall usage of Bitcoin, the penetration rate of the Lightning Network is currently low. However, this may be because not enough applications have used it. However, the development of applications on a certain platform does not necessarily mean that users have demand for them.
In addition, despite the growing demand for a large number of cryptocurrency-related products over the past year or so, payment solutions are not necessarily included in this. For example, crypto derivatives and some applications that can earn interest have become increasingly popular. But growth in both areas shows that people tend to view cryptocurrencies as a commodity rather than a currency that meets the criteria for being a medium of exchange and a means of storing value.
If the demand for such products and platforms continues to grow, any argument that there is market demand for Lightning Network or any other payment solution will be overturned.
On the other hand, the debate over whether Bitcoin will become a safe haven continues in the face of the economic downturn. Currently, world events including a coronavirus outbreak, Brexit, stock market and commodity plunges, and uncertainty about the US presidential election mean that this theory may soon be tested.
If Bitcoin is widely adopted as a store of value, it may drive its demand for a better transaction medium, creating a more convincing use case for the Lightning Network. However, the reverse is also true. The reality is that Lightning Network was born too early, and there is not enough time to verify its effectiveness. Obviously, it is also plagued by various maturity issues. Whether the need to develop applications and nodes to attract users, or the lack of users to affect applications and nodes, such a "chicken first or eggs first" problem is a common challenge that such emerging technologies need to overcome.