Exploring Lightning Network Challenges and Recent Technological Advances
Bitcoin's Lightning Network (LN) is a second layer added to the Bitcoin network, allowing transactions to be made between parties outside the blockchain - called out-of-chain transactions. The Lightning Network has often been considered a game changer in the evolution of cryptocurrency. It is designed to speed up transaction processing times and decrease associated Bitcoin blockchain costs. The lightning network was conceived by two developers, Thaddeus Dryja and Joseph Poon, in 2015.
Although Lightning Network has experienced growth and development since its inception, challenges remain. Bitcoin price fluctuations have prevented encryption from becoming a pervasive method of payment for commercial and consumer transactions. In addition, there are costs involved in using the Lightning Network as transactions still need to be made on the blockchain.
In this article, we highlight why the Lightning Network is needed and three issues the network is facing. In addition, we review the future of the Bitcoin Lightning Network, exploring recent technological developments that could impact and improve the network in the coming years.
- • Bitcoin Lightning Network (LN) is a second layer added to the Bitcoin network, allowing transactions to be made outside the blockchain.
- • Lightning Network is designed to accelerate transaction processing times and lower costs associated with the Bitcoin blockchain.
- • However, Lightning Network still has associated costs and may be susceptible to fraud or malicious attacks.
Distributing copies of data to network participants helps avoid transaction-related problems and disputes, as well as prevent fraud. For example, if someone hacked into the network and changed the details of a transaction, the copies in the distributed ledger could be revised and the fraudulent transaction could be stopped.
- • Bitcoin price fluctuations can prevent encryption from becoming a popular payment method, limiting the use of the Lightning Network.
- Understanding Bitcoin Lightning Network
- As Bitcoin gains popularity, more and more transactions are processed on its blockchain network. Blockchain technology is essentially a shared database in which your distributed ledger allows participants to see all transactions that have been recorded. Transactions made on the blockchain network are called on-chain transactions.
Bitcoin scalability issue:
However, as all participants or nodes receive copies of transactions, the process of validating transactions by each node – called miners – in the network can stall the system, particularly during periods of high transaction volume. As a result, Bitcoin faced a scalability issue, which means there are challenges when the network tries to process more transactions simultaneously. In order for Bitcoin to move to the next level and process more data, the network needs to build scale, which would allow more transactions to be processed quickly and efficiently.
Network latency has led to higher transaction rates as miners take longer to validate transactions. Additionally, participants can sometimes pay a higher fee to process their transactions faster. Bitcoin's Lightning Network was introduced to help improve processing times, increase scalability and reduce network transaction fees.
The Lightning Network:
In short, the lightning network allows participants to transfer bitcoins to each other for no fee using their digital wallets. Payment channels are created between the two users so that they can trade with each other - in other words, off-net transactions. The Lightning network is another layer added to the Bitcoin blockchain so that it can process micropayments between participants.
The network's goal was to create channels in which payments could be made between users without any fees or delays. By allowing transactions to be made out of the chain, the processing time and number of transactions made over the network in the chain would be improved.2
1. This does not completely solve the Bitcoin transaction fee problem
Lightning Network is often touted as a solution to the problem of rising bitcoin transaction fees. Its proponents claim that transaction fees, which is one of the direct consequences of the clogged Bitcoin network, will fall after the technology pulls transactions off the main blockchain. But bitcoin congestion is one of several factors influencing your transaction fees. Furthermore, the cryptocurrency fee itself is a large component of the overall costs of the electricity grid.
Channel opening and closing costs
Specifically, there are two parts to your costs. The first part consists of a fee equivalent to Bitcoin transaction fees to open and close channels between the parties. Although the lightning network allows payments between two parties, an opening or deposit transaction must be done via on-chain. The two parties can then process multiple transactions with each other, but once the account has settled, they need to record a closing transaction for the settled amount on the blockchain.
In addition to transaction fees for opening and closing channels, there is a separate routing fee for transferring payments between channels. As grid fees are quite low, in theory, it should attract more participants. However, if fees are so low for routing payments between nodes, there may not be any incentive for nodes to facilitate payments. In addition, as companies adopt the lightning network as a payment method, they may also charge fees.
This problem contrasts with the approach taken by other cryptocurrencies to grow their payments business. For example, Dash has free software plugins for merchants to download and use. Dash uses Masternodes, which must have deposited 1,000 in Dash coins so they can approve transactions very quickly. User fees are approximately two cents per transaction, and Dash payments are available from over 4,000 merchants.45
2. Staying online at all times makes nodes susceptible
Nodes in the Bitcoin Lightning Network must be online at all times 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 that stores the private keys is compromised. However, refrigerated coin storage, which is considered the most secure method of storing cryptocurrencies, is possible in a lightning network.
Offline transaction risk:
Going offline creates its own set of problems in the Lightning Network. According to Dryja, it is possible for one of the two parties to a payment channel to close the channel and sheath funds while the other is absent. This is known as fraudulent channel closure. There is a deadline for contesting the closure of a channel, but the prolonged absence of one of the parties can result in the expiration of that deadline.
Another risk to the network is congestion caused by a malicious attack. If payment channels become congested and there is a hack or malicious attack, participants may not be able to recover money fast enough due to congestion.
According to Dryja, "Forced expiration of many transactions can be the biggest systemic risk when using the Lightning Network."
If a malicious party creates multiple channels and forces them to expire at the same time, which would be passed to the blockchain, the congestion caused could overload the block's capacity. A malicious attacker can use congestion to steal funds from parties that cannot withdraw their funds due to the congestion.
3. Bitcoin price fluctuations
The advent of Lightning Network should also herald the viability of Bitcoin as a medium for daily transactions. Customers can open payment channels with companies or people they do business with frequently. For example, they can open payment channels with their favorite landlord or e-commerce store and transact using bitcoins.
However, Bitcoin still has a long way to go before it gains popular traction. The increase in their trading volumes is largely attributed to an increase in trading volumes. In other words, Bitcoin's popularity is a double-edged sword, as increased attention attracts investment, but it also attracts more traders, increasing volatility or price fluctuations in cryptocurrency. Price volatility makes it a challenge for companies to use Bitcoin as a payment method when pricing their products to sell to customers or buy inventory from their suppliers.
For example, let's say a company has to pay an invoice to its bitcoin supplier. Typically, vendors give customers time to pay, such as 30 days. If the bitcoin price has increased by 10% during the 30-day period, the company has to submit another 10% amount in fiat currency or other cryptocurrency to convert to Bitcoin and pay the invoice to pay the supplier. This currency exchange risk exists because the business may be paid for by its customers in fiat currency and not Bitcoin. Currency risk also exists for consumer transactions as most individuals' wages or salaries are not paid in Bitcoin, causing transactions to be converted from fiat currency into Bitcoin.
As a result, Lightning Network's overall effect on reducing Bitcoin transaction fees and build scale may be limited as encryption has not yet been adopted as a payment method.
The Future of Bitcoin:
Lightning Network Challenges still exist with Bitcoin's Lightning Network and its ability to scale up while reducing transaction fees. However, the core technology team incorporated new use cases and researched additional resources. As a result, there have been significant developments that are expected to improve the network in 2021 and beyond.
Larger payments via Lightning Network
Lightning had initially limited the channel size to a maximum of 0.1677 BTC, but in 2020 it was announced that the restrictions would be removed so that customers could have larger channels. These "Wumbo" channels are designed to increase the use and usefulness of Lightning Network for consumers and businesses.
One of the most promising early use cases to emerge involves cryptocurrency exchanges. In December 2020, the Kraken exchange announced that it will begin supporting Lightning Network in 2021. In principle, only withdrawals will be allowed as systems acclimate, but payment channels may become possible so that Lightning transactions can be made directly with the bag.
Surveillance Towers are third parties that run on us to prevent fraud within the Lightning Network. For example, if Sam and Judy are trading and one of them has bad intentions, they can steal the other participant's coins. Let's say Sam and Judy made an initial deposit of 10,000 bitcoins and a transaction of 3,000 took place in which Sam purchased goods from Judy. If Judy logs out of his system, he will be open to possible fraud. Sam could transmit the initial state, which means that both would get their initial deposits back as if no transactions had been made. In other words, Sam would have received 3,000 BTC in free merchandise.
This process of closing the channel based on the initial state versus the final state in which all transactions were made is called fraudulent channel closure. The watchtower or third parties can monitor transactions and help prevent fraudulent channel closures.
The Bottom Line:
The Lightning Network is an ever-evolving concept that is likely to make a significant difference to the Bitcoin blockchain. However, the network may not be the solution to all the challenges Bitcoin faces. Furthermore, as new changes and improvements are made to the network, there is the potential for new problems within the cryptocurrency ecosystem. Much will depend on research and development of new technologies in the future.