Just before Christmas Bitcoin transaction fees skyrocketed to nearly $35 per transaction. In late December and January of 2018 they’ve declined steeply – on January 24, 2018 the median transaction fee was $5.85 – but both the increase and the volatility leave cryptocurrency investors looking for other options, both in terms of speed and price. Many different solutions have been proposed to solve these Bitcoin problems, some already in development. One many have hopes for is called the Lightning Network.
What is the Lightning Network?
How will it work? Two parties wishing to transact will be able to put Bitcoin into a multisig address and sign a transaction that alters the amount of Bitcoin each party is able to redeem. The transaction happens off-chain, and either party can close the payment channel at any time. When the transaction is finished, the last signed transaction statement with the most current balances for both parties will be broadcast and included in the Bitcoin blockchain. Because the transaction will occur off the blockchain, the fees will be much lower and the speed much faster. Transactions will also be more private because individual transactions will not be stored in a public ledger forever.
Blockchain smart contracts ensure that these transactions are secure. Any user who is connected to their network of payment channels through multiple hops can transact. What happens if there is a later dispute between parties? Either party would be able to send the last valid statement (signed by both parties) to the blockchain to adjudicate the dispute objectively.
The Lightning Network in theory has real benefits for users over the current Bitcoin transaction process. Bitcoin has very high transaction fees compared to other altcoins – dollars compared to cents – which has increased demand for altcoins. However, the authors of the original Lightning Network white paper believed that the fees involved in utilizing the Lightning Network, once established, would effectively be zero and payments would be accepted as valid immediately. Bitcoin is more trusted and valued by cryptocurrency investors than most altcoins. The Lightning Network essentially is a way of working around the constraints of Bitcoin while still taking advantage of Bitcoin’s longevity, higher liquidity, and lower volatility.
How long will it be before the Lightning Network is a reality? It already is. As of January 26, 2018, mainnet implementations of Lightning already had over 205 nodes and 548 channels. While still in the testing phase, people are already transacting Bitcoin over the network, against the cautions of its developers. TorGuard has announced that it would be accepting Lightning payments, Blockstream is on board, and, according to a Lightning main net explorer, more than $33,000 in Bitcoin may already have been transacted via Lightning Networks. Some of those users have lost money already, however.
The Lightning Network urges users to wait for now. Alex Bosworth, a Lightning developer, stated, “A lot of people want to get on mainnet and it’s hard to tell them that it’s not quite ready and that they should test on testnet. I wouldn’t recommend using mainnet unless you are explicitly testing and fully know what you are doing.” Use of the network has resulted in the uncovering of dozens of bugs and usability issues, but may also make it harder for developers to finish their work.
For now, users are advised to wait and be patient to take advantage of the Lightning Network’s capabilities.