A paper published by the FRBC claims that the lightning could have prevented much of the transaction congestion.
Despite the many criticisms leveled against Bitcoin (speculation bubble, carbon emission, etc.), it is apparent that the most essential crypto-currency has evolved into a genuine financial asset. However, one of the most serious problems that hamper Bitcoin’s development as a means of payment is network congestion, where transactions often take hours or even days to be confirmed.
A new research paper published by the Federal Reserve Bank of Cleveland (FRBC) entitled “Lightning Network: Turning Bitcoin into money” examines the potential of the Lightning Network (LN) to reduce network congestion and improve BTC’s scalability.
LN and its Promise to Bitcoin
Usage of the Lightning Network is associated with reduced mempool congestion in Bitcoin and with lower fees. According to the Lightning Network’s off-chain netting benefits, Bitcoin could scale and function better as a means of payment. Although the centralization of the Lightning Network seems to have little impact on its efficiency, it may boost the proportion of low-fee transactions.
LN has been operational since early 2018 and is currently being developed by Blockstream, Lightning Labs, and ACINQ. The number of nodes and channels continues to grow, although the network is still in its infancy.
Two types of Lightning Network nodes are regular and hub nodes. Regular nodes only have one channel open, while hub nodes can have many channels open. Since fewer transactions need to be recorded on the blockchain, less memory and energy are needed to run a Bitcoin node. This saving lowers the cost of maintaining the blockchain, allowing more nodes to participate and making the system more secure against a double-spending attack.
The paper further found that the Lightning Network can significantly reduce network congestion. For example, in December 2017, when the mempool was full, and transaction fees were high, LN could have reduced network congestion by 93 percent.
According to the research, the Lightning Network’s off-chain netting advantages may help Bitcoin scale and operate more effectively as a payment method. However, the centralization of the Lightning Network does not appear to make it any more efficient, although it may raise the proportion of low-fee transactions.
Demerits of Crypto as a Means of Payment
While LN has the potential to improve Bitcoin’s scalability, there are a number of problems with using cryptocurrency as a means of payment.
Cryptocurrency is often subject to volatility, which can make it difficult to use for everyday purchases. For example, if the price of BTC increases by 10% overnight, then a cup of coffee that cost $3.50 yesterday may now cost $3.85. This can make it difficult for merchants to price goods and services in cryptocurrency. As a result, only a limited number of businesses accept cryptocurrency as a form of payment.
LN if Widely Used can Solve the Problem with Crypto
If LN is widely used, it could potentially help to solve some of the problems with using cryptocurrency as a means of payment.
Because LN channels allow for near-instantaneous payments, merchants would not need to worry about fluctuations in the price of BTC. LN channels are also reversible, meaning that if a customer pays a merchant in BTC and changes their mind later, the merchant can refund the customer. This would make it more feasible for merchants to accept BTC payments.
Even if LN is widely used, there are still problems with Bitcoin. The block size limit on the Bitcoin network means that there is a limited amount of space for transactions. This can lead to congestion and high fees during times of peak demand.
These scalability problems need to be addressed for Bitcoin to be able to handle more transactions. This is why second-layer solutions like LN are so important. They provide a way to scale Bitcoin without changing the underlying protocol.
LN has the potential to improve Bitcoin’s scalability by providing a way to scale the network without changing the underlying protocol. However, LN is still in its early stages of development and is not yet widely used. In addition, several problems with using cryptocurrency as a means of payment need to be addressed before it can be widely adopted.
Do you think LN will be successful in improving Bitcoin’s scalability? Let us know in the comments.
