The Lightning Network is a secondary layer primed to help Bitcoin scale by increasing the speed and amount of possible transactions. Ultimately making Bitcoin a more effective medium of exchange. A better money and a more useful network.
Scaling in layers has objectively proven to be the best approach when it comes to the “Blockchain Trilemma” which notes there are trade-offs between:
Some cryptocurrencies attempting to rival Bitcoin chose to forsake decentralization and try to optimize the other two points, security and scalability. This resulted in some networks being able to:
- Halt trading
- Move to a new system where no one can withdraw
- Have secondary layers being hacked
- Simply breaking and going offline
Bitcoin chose to prioritize decentralization on its base layer, this provides unrivaled security assurances. It turns out the best way to scale a rivalrous digital money and decentralized network is via secondary layers such as the lightning or liquid networks.
Preserving decentralization enables Bitcoin users to have confidence in its security and unchanging monetary policy. These attributes of Bitcoin at a foundational level have led individuals around the world to contribute to the open source code and additive secondary networks, such as the Lightning Network.
Bitcoin’s foundational layer can only process approximately 7 transactions per second (TPS), well below the speeds necessary to support a global currency. This transactional throughput limitation is solved via a secondary layer called Lightning, which is already capable of handling around 1,000,000 transactions per second around the globe.
Solving the dichotomy of decentralization and scalability is analogous to what occurred historically with gold and paper money. Gold was a good store of value but its physicality and weight created disadvantages in terms of being a medium of exchange. Gold lacked divisibility, was expensive to store, send and verify the total supply or legitimacy of each coin or bar. That is why the “gold back” paper money was introduced. To make gold more saleable, a better medium of exchange, and easily transported over a wider geographical area.
The centralisation of gold, from individuals to banks, made it impossible to verify the amount of gold that actually existed. With the inevitable temptation of fractional reserve banking, soon the paper IOU’s issued by the banks outpaced the banks’ gold storage, leading to bank runs and eventually the severance of paper currencie’s peg to the value of gold. Colloquially known as the “Nixon Shock”.
Bitcoin, like gold, provides a powerful store of value but comes with limitations in terms of speed and scalability as a medium of exchanges. Like paper notes, the Lightning Network solves these issues and makes Bitcoin more saleable across space and at ‘lightning speed’. Unlike paper and gold, Bitcoin and Lightning are superior as it requires no central authorities issuing notes, no bank holding your bitcoin, and no paper IOU’s or fractional reserve lending changing or debasing the monetary supply.
The Lightning Network works by creating a bar tab, essentially. You put your bitcoin up as collateral, which allows you to open a tab with another node on the lightning network. You can send satoshis (aka as sats, equal to 1 / 1,000,000 of a bitcoin) back and forth as much as you like for a fraction of a penny, and often for free! Once you are done transacting with your peer, you close out the tab which results in an on-chain (bitcoin’s foundational network) transaction. Simple, right?
Opening a ‘tab’ is formally known as creating a channel. Either party can close this channel at any time and when this occurs, you pay the on-chain transaction fee and you settle your tab, parting ways with your corresponding sats.
With the Lightning Network, Bitcoin has a way to scale, obliterating the feeble arguments tossed about by altcoin critics. While many crypto’s sacrifices decentralization and security in exchange ‘speed’, it came at the cost of highly centralized and often unstable networks. By scaling through layers, Bitcoin has created a highly securely and highly efficient network. What is the reason to adopt other networks that are less secure and highly centralized when Bitcoin and Lightning provide both higher security, more decentralization and a faster network of exchange? Countries around the world have now begun adopting Bitcoin as legal tender, shattering the dreams of scamcoiners and altcoiners alike.
Bitcoin is made up of both the network and the native currency. Lightning follows suit, with the same native currency (sats) but hosts a new network that allows for more development. This allows us to send and receive money instantly, regardless of location and distance. It also provides its users a powerful way to store money in two types of ‘accounts’; a savings account (cold storage) and a checking account (hot wallet).
By circumventing the need for a centralized intermediary, with their overhead costs and censorship, micropayments are also possible. For example, THNDR Games, a company that pays you sats to play games is using the lightning network to make sub $0.01 reward transactions.
Remittances, regardless of which currency you send and which currency they want to receive, can now be facilitated by the lightning network for a fraction of a cent. You can send dollars from the U.S to someone who wants to receive Rupees in India or Euros in Europe, instantly and incredibly cheaply. Buh-bye parasitic traditional finance (talking to you Wester Union) charging 2% – 3% per transaction and some who were taking a 20% cut of the transaction for international remittances!
Innovation and disruption go hand in hand with Bitcoin and the Lightning Network. Bitcoin is the better money, which was built for the benefit of all mankind. All that humanity needs to do now is voluntarily adopt the open networks that are ready to change the world.
If you are with the AmberApp tribe and want to learn more, reach out to the support within the app or reach out in the Telegram group and we will be happy to help you along the hero’s journey. Thanks for doing the Proof of Work and learning about the Lightning Network, see you next time!