Bitcoin network
The most famous nowadays cryptocurrency Bitcoin was launched back in 2009. After BTC became widely known, it began to be predicted a rapid success. The most optimistic predictions were that the coin will be able to compete with traditional payment systems such as Visa and Mastercard – and even displace them to the background. However, this did not happen.. Not least because of the low transaction speed and high fees in the Bitcoin network. This feature of the network is called “Bitcoin’s scalability problem,” due to the limited block size in the blockchain network, and as a consequence, the bandwidth.
The Lightning Network technology was designed to overcome the aforementioned shortcomings, and dramatically increased transaction processing speeds and reduced transaction costs;
Lightning Network
The Lightning Network is a Layer 2 network protocol (that is, it deploys on top of the main blockchain) that is based on the Bitcoin network and provides fast and inexpensive transactions for users, thereby eliminating the problem of high commissions and slow verification of blocks by miners. Using onion routing, the protocol breaks up the data into multiple packets to send it through different nodes on the network, using end-to-end encryption.
Essentially, the Lightning Network conceptually allows for efficient microtransactions of a few dollars off the main chain through multiple payment channels between two or more parties. Consequently, it is not a network capable of transferring large amounts of money in cryptocurrency (here Bitcoin is beyond competition), but rather a payment system that can be used in everyday life for ordinary payments.
In the document presented to the community, the developers of Lightning Network, in addition to describing how the protocol works, explicitly stated their desire to surpass the peak TPS (number of transactions per second) achieved by Visa in 2013.
Thus, Lightning Network was immediately conceived as a direct threat to traditional international payment systems, capable of poaching large numbers of users through the greater efficiency of a decentralized P2P network.
Nevertheless, there are still many challenges. In the case of blockchain technology, there is the so-called “scalability trilemma.. It points to the difficulty of solving three problems simultaneously: speed, decentralization, and security. You have to choose two points out of three. Classic Bitcoin protocol sacrificed speed in favor of security and decentralization. Lightning Network is designed to add speed, but it does so at the expense of security: Lightning Network nodes could hypothetically be attacked by unscrupulous users. Also among the problems are higher requirements for the level of training of users, for whom the interface of blockchain services is less familiar and understandable in comparison with banking applications (however, this is a consideration for any cryptocurrency).
If Lightning Network can solve these problems, it will likely try to put sticks in the wheels of major payment systems like Visa and Mastercard. Encouragingly, public figures such as Jack Dorsey, former Twitter CEO, supported the idea of Lightning Network. In 2018, Dorsey experimented with the Lightning network as a tip payment system on Twitter.
Low transactions.
But back to what Lightning Network already excels at: lower transaction costs. In Bitcoin, you often have to pay almost the same amount of commission for moving a few dollars. How much does it cost to make a Lightning transaction? There are two types of fees you will have to deal with when using this network;
The first is a base fee, charged randomly to each node. Usually these are very small fractions of a cent (a few satoshi to be exact) needed to stimulate traffic to the right node. The second includes a commission based on the amount of payment within a particular node. In this case, the channel owner can set a commission calculated as a percentage of the total number of satoshi sent (for example, 0.01 satoshi per 1 satoshi sent).
There are special cases where the total commission for using the Lightning channel is almost zero, as well as cases where the commission is excessively high.
Lightning Network vs. Visa and Mastercard
If we compare those costs with the costs of major payment systems like Visa and Mastercard, we see that the latter are much more expensive. Bank card companies charge different fees depending on the type of merchant, the amount of the transaction, and where the transaction takes place;
Typically in the U.S. (which is one of the most important markets in terms of payment system opposition) Visa charges an exchange fee ranging from 1.15% + $0.05 to 2.40% + $0.10. Visa also charges a 0.14% fee per transaction;
Mastercard charges an exchange fee of 1.15% + $0.05 to 2.50% + $0.10. Their additional fee is 0.1375% for transactions under $1,000 and 0.01% for transactions of $1,000 or more.
To date, it seems unlikely that traditional payment systems will be threatened by the technology, which is still under development. But blockchain developers have made staggering strides that many will probably soon have to reckon with.
But it’s not enough to have more efficient payment technology to compete with Visa and Mastercard, which are already deeply rooted in people’s daily lives. Moreover, the excessively low cost of transaction fees can be seen as a factor in slowing the widespread adoption of Lightning Network technology, since economic incentives are needed for widespread adoption.. Then market agents will be willing to support this decision. Plus there are precedents with unstable operation of the Layer 2 network.
Conclusion
The challenge, as mentioned earlier, depends on several factors, as well as the overall bandwidth of the network. To become mainstream, the Lightning Network must increase its bandwidth to a level far beyond today’s. Right now, the network is capable of supporting transactions of up to 4,828 BTC, the equivalent of about $148 million;
According to some estimates, the network is capable of supporting transactions of up to 4,828 BTC, the equivalent of about $148 million. This is an insignificant amount compared to the huge billions moving through traditional payment systems. But the direction seems right, as the value of Lightning Network bandwidth grows more and more over time.