Bitcoin was created as a peer-to-peer electronic cash system, meaning transfer of value without an intermediary. But over time, as Bitcoin adoption grew and it became the most decentralized and secure blockchain, scalability concerns emerged for Bitcoin-based transactions.
Transactions on the Bitcoin network take anywhere between two minutes to several hours. Unlike Bitcoin’s five transactions per second (TPS), blockchains like Ethereum can do 30, while newer ones like Solana boast even much higher TPS, as high as up to 65,000 TPS.
This led to the emergence of Lightning Network (LN), a layer-2 solution built on the Bitcoin blockchain. This solution was created to help solve Bitcoin’s problem of scalability and compete against newer cryptocurrency projects that are faster and cheaper.
A Look at Lightning Network
Layer-2 solutions are a key component for scalability in blockchains, and when it comes to Bitcoin, the Lightning Network is the most crucial one.
The way the Lightning Network works is it uses payment channels between two parties. To create a payment channel, the payer has to lock a certain amount of BTC onto the network.
Once the channel is established, it allows the transacting parties to send an unlimited amount of transactions. The network acts as its own little ledger, with the main Bitcoin blockchain only updated when two parties open and close a channel.
So, by not requiring the main blockchain to be involved in the transactions happening on the layer-2 protocol, Lightning Network makes the transactions almost instant. When the two parties eventually decide to finish transacting, they can close the channel, and only then are all of its transactions consolidated into one transaction, which is then sent to the main network to be recorded.
This way, the Lightning Network offers the benefits of scalability, speed, and micropayment support over the Bitcoin mainnet, which expands Bitcoin’s utility beyond just a store of value.
Growing Lightning Network Capacity
As for how it all started, in Feb. 2015, Joseph Poon and Tadge Dryja started working on decreasing the transaction fees of Bitcoin and, a year later, published a detailed white paper. Then, within a couple of years, Lightning Labs released a beta version for developers to test. Over time, the company that maintains the Lightning Network gained traction and support from the likes of former Twitter CEO Jack Dorsey, who shared plans to integrate the Lightning Network with the social media platform.
In 2020, during the COVID-19 pandemic, the Lightning Labs team released several features, such as Keysend and Wumbo Channel, with the latter aimed to increase the transaction size that can be performed over the LN.
Since then, the Lightning ecosystem has grown to cover a wide range of projects and solutions across many verticals, including infrastructure, wallets, payments, node management, rewards, and gaming.
Currently, the network has a Bitcoin capacity of 4.93k, which is up from 4.82k on August 28 but down from the 5.64k high in July this year. At the beginning of 2023, the amount of bitcoin locked in payment channels on the network was 5.2k, and 4.69k a year ago.
This growth in Lightning Network this year is the result of increased adoption from crypto exchanges as well as the period of congestion and higher transaction fees associated with the rise in popularity of the digital artifact project called Ordinals, which are Bitcoin NFTs inscribed on the digital asset’s lowest denomination satoshi.
After Binance, Coinbase to Integrate LN
The largest cryptocurrency exchange in the US, Coinbase (COIN), has confirmed its decision to integrate Lightning Network as users seek faster and cheaper Bitcoin transactions.
This comes after another major crypto exchange, Binance, announced a few months ago, in July, the completion of Bitcoin LN integration for BTC withdrawals and deposits. Binance users can choose to withdraw or deposit BTC by selecting “LIGHTNING” as an option with other options, including BNB Smart Chain (BEP-20), Bitcoin, BNB Beacon Chain (BEP2), BTC (SegWit), and Ethereum ERC-20.
The world’s largest cryptocurrency exchange’s LN move followed rivals including Kraken and Bitfinex. Up until recently, both the crypto trading platforms had no intent to adopt the layer-2 solution, with many arguing that LN integration offered fewer incentives for exchanges’ income. However, in a move counter to this narrative, Coinbase CEO Brian Armstrong confirmed the exchange’s decision to integrate Lightning Network this week.
“Bitcoin is the most important asset in crypto, and we’re excited to do our part to enable faster/cheaper Bitcoin transactions. Will take some time to integrate, so please be patient,” said Armstrong.
The decision comes a month after Viktor Bunin, a protocol specialist at the publicly listed company, started investigating the feasibility of LN integration. During this timeline, MicroStrategy founder Michael Saylor and Square CEO Jack Dorsey, whose Cash App added support for LN about a year ago following the initial integration early in 2022, publicly questioned Armstrong’s position on Lightning Network.
At the time, Armstrong called the idea “non-trivial” but “worth doing,” and in response to public questions from Dorsey, he said the company is not ignoring Bitcoin, adding that the platform has “onboarded more people to Bitcoin than probably any company in the world.” Last month, The CEO’s response stated, “I’m all for payments taking off in Bitcoin.”
Now, with Armstrong’s announcement of Coinbase’s LN integration, the crypto community is celebrating the decision, which will allow more affordable and efficient Bitcoin microtransactions.
“Bitcoin is the world’s digital monetary system, and Lightning is Bitcoin’s payments layer,” wrote Cathie Wood on X (formerly Twitter) in response to Armstrong’s post on Wednesday. Wood is the CEO of ARK Invest, which is the second-biggest shareholder of Coinbase.
Building a Universal Protocol for Money on the Internet
Coinbase’s support is just the latest step in Bitcoin payments adoption, which already includes PayPal co-founder David Marcus’ Lightspark, a company building on Bitcoin’s lightning network.
Before working on Bitcoin, Marcus was working on Meta’s now-defunct stablecoin wallet app, NOVI. Between failed partnerships and backlash from regulators, Marcus stepped down from the firm in late Nov. 2021, saying his “entrepreneurial DNA” was encouraging him to move on, and that’s when he launched Lightspark six months later.
In his recent interview, Marcus shared his vision for Bitcoin, which is to transform it into a global payment network. He also emphasized the importance of expanding Bitcoin’s utility, noticing how the cryptocurrency has made strides over the past decade, evolving from an obscure digital currency to a recognized store of value and hedge against inflation.
However, he argued that Bitcoin has the potential to play a much broader role in the global financial ecosystem, similar to PayPal but operating on a decentralized network. But for that, the cryptocurrency needs to evolve further to offer faster, cheaper, and more efficient transactions, making it accessible to a broader audience.
He then went on to say that his company, Lightspark, is “doing whatever” it takes to realize the full potential of the Lightning Network and that “it’s time for the world to have a universal open protocol for payments.”
But while he is pushing the world past “the fax era of global payments,” he doesn’t believe that Bitcoin will ever become a popular or common payment method. “Our view is actually that Bitcoin is not the currency that people will use to buy things,” the entrepreneur said during the interview.
This is why he bets on layer-2 scaling solutions. Hence, Lightspark’s goal is to turn Lightning into a “universal protocol for money on the internet,” similar to how texting is a universal protocol for communication, with the currencies transferred over the network being the fiat currencies we know and use today.
“A fragment of a Bitcoin on top of lightning is like a small packet, a data packet on the internet only for value,” said Marcus. Users could send any currency they’d like, such as dollars, yen, or euros, and receive any money of choice on the other side, with Lightning acting as the low-cost, real-time, and cash final settlement layer.
And this is how we are going to see more adoption, said Marcus back in June, in an interview, by “building the capabilities that will enable any enterprise out there to access” a super low cost, real-time settlement network for the internet, which is interoperable and open for any developer to build on.
Fellow PayPal co-founder Peter Thiel is also bullish on the largest cryptocurrency by market cap, considering it an alternative to today’s “bankrupt” central banks and “fiat money regime.” In late 2020, PayPal helped kickstart the bull run by allowing users to buy, sell, and hold crypto, including BTC, ETH, BCH, and LTC. Then, last month, it launched its own stablecoin called PYUSD to transform payments in digitally native environments.
Growing Lightning Network Development
Much like Lightspark’s Marcus, many in the crypto community are of a similar view with Jack Mallers, CEO of Strike, a payments company that leverages the Lightning Network for cheaper global currency transfers and remittances in 65 countries like Nigeria, Ghana, and Argentina where users can receive transactions as local currency within their bank account.
The app leverages Lightning for payments, which means it actually uses Bitcoin to move value around the world while customers can spend and receive fiat currencies like dollars, euros, or even stablecoins. The bitcoin-based financial app counts major companies like Visa, Clover, and Fiserv among its partners.
In March this year, Mallers, who is also the CEO of Zap, a bitcoin investment and payments company that transacts on the LN, also said that he believes “Lightning will serve as the single value transfer protocol for the earth.”
However, he believes we are still in the early phase, and as we evolve in this journey, “the lowest-hanging fruit is: how do you get fiscal value across planet earth?”
Most recently, Stroom Network, a liquid staking project for Bitcoin’s Lightning Network, raised $3.5 million in an oversubscribed seed funding round to give users the ability to trustlessly use their Bitcoin capital simultaneously on both the LN and Ethereum.
The way the protocol works is that Stroom assigns BTC deposits within the Lightning Network to generate routing fees. At the same time, the protocol generates lnBTC on a 1:1 basis, which is like wrapped BTC (wBTC). This way, users can pursue yield opportunities on Ethereum much like how they would when using wBTC. With this setup, the platform aims to solve Lightning Network’s issue of lack of liquidity “once and for all.”
Offline Bitcoin Payments on LN
In addition to all this, there have also been attempts to make Bitcoin payments offline. Because unless you have cash, things can get really problematic when there is no access to the internet.
Earlier this month, researchers from Florida International University explored sending payments over LN without Internet access and found that it is actually possible under the right circumstances.
According to the research report titled “LNMesh: Who Said You need Internet to send Bitcoin? Offline Lightning Network Payments using Community Wireless Mesh Networks”, the experiment used local “mesh networks” instead of the Internet. Under this system, nodes are connected directly via WiFi and Bluetooth, creating a local Lightning Network, which researchers called LNMesh.
The research found “success rates up to 95 (percent) on large mobile wireless mesh networks,” provided Lightning channels have sufficient liquidity.
LN allowed offline payments to be settled because the payments are off-chain and not recorded to the Bitcoin blockchain. As a result, as long as nodes can communicate with each other through wireless technologies, they can perform offline LN payments, said the research. Moreover, there is no need to change the existing Lightning protocol or code to get offline payments working.
Concluding Thought
The Lightning Network has spurred many promising Bitcoin startups, such as CashApp, Strike, River, IBEX, Amboss, Zebedee, and Voltage, to name a few.
However, the Lightning Network is still an experimental technology, with its users warned to exercise caution when committing hard-earned BTC to LN since you can easily lose funds if you aren’t experienced. Moreover, there is a counterparty risk during transactions and a lack of functional scalability.
Having said that, Bitcoin’s Lightning Network has come a long way over the years. After all, constant development is helping build a robust and user-friendly protocol that can help the Lightning Network gain broader acceptance and subsequently increased adoption of Bitcoin.
