Reading time: ~2 m
How effective is the Lightning Network in terms of Bitcoin scalability compared to traditional financial solutions like Visa and Mastercard? Let’s try to figure it out.
The most famous cryptocurrency today, Bitcoin, was launched back in 2009. After BTC became widely known, it began to prophesy rapid success. In the most optimistic forecasts, it was assumed that the coin could compete with traditional payment systems – such as Visa and Mastercard – and even shift them to the background. However, this did not happen. Not least due to the low transaction speed and high commission in the Bitcoin network. This feature of the network is called the “Bitcoin scalability problem”, associated with the block size limit in the blockchain network, and as a result, the throughput.
The above shortcomings were once called upon to overcome the Lightning Network technology, which dramatically increased the speed of transaction processing and reduced transaction costs.
Lightning Network is a layer 2 network protocol (i.e. deployed on top of the main blockchain) that is based on the Bitcoin network and provides fast and low-cost transactions for users, thereby eliminating the problem of high fees and slow block validation by miners. Using onion routing technology (literally: onion routing), the protocol splits data into several packets, in order to then send it through different nodes (nodes) on the network using end-to-end encryption.
Essentially, the Lightning Network conceptually allows multi-dollar microtransactions to be made efficiently off the main chain through multiple payment channels between two or more parties. Therefore, it is not a network capable of transferring large amounts of money in cryptocurrency (Bitcoin is beyond competition here), but rather a payment system that can be used in everyday life for ordinary payments.
In a document presented to the community, the developers of the Lightning Network, in addition to describing how the protocol works, explicitly stated their desire to surpass the peak TPS (transactions per second) achieved by Visa in 2013.
Thus, the Lightning Network was immediately conceived as a direct threat to traditional international payment systems, able to lure a large number of users due to the greater efficiency of a decentralized P2P network.
However, there are still many problems. In relation to blockchain technologies, there is a so-called “scalability trilemma”. She points to the difficulty of addressing three issues at the same time: speed, decentralization, and security. You have to choose two points out of three. The classic Bitcoin protocol sacrificed speed in favor of security and decentralization. The Lightning Network is designed to increase speed, but this is achieved at the expense of, among other things, a decrease in the level of security: Lightning Network nodes can hypothetically be attacked by unscrupulous users. Also, among the problems, one can note higher requirements for the level of training of the users themselves, for whom the interface of blockchain services is less familiar and understandable compared to banking applications (however, this consideration applies to any cryptocurrencies).
If the Lightning Network can solve these problems, the network will probably try to put a spoke in the wheels of the largest payment systems like Visa and Mastercard. It is encouraging that public figures such as Jack Dorsey, the former CEO of Twitter, have supported the idea of the Lightning Network. In 2018, Dorsey experimented with the Lightning network as a Twitter tip payment system.
But back to what the Lightning Network has already excelled at: lowering the cost of transactions. In Bitcoin, moving a few dollars often comes with almost the same amount of fees. How much does it cost to make a transaction through the Lightning channel? When using this network, you will have to deal with two types of fees.
The first concerns the base fee, which is arbitrarily charged for each node. Usually these are very small fractions of a cent (more precisely, a few satoshi units) needed to stimulate traffic on the desired node. The second includes a fee based on the size of the 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 fee for using the Lightning channel is almost zero, as well as cases where the fee is excessively high.
Lightning Network vs. Visa and Mastercard
If we compare these costs with the costs of large payment systems such as 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 the location where the transaction takes place.
Usually in the USA (this market is taken as the basis, as it is one of the most important in terms of confronting payment systems), Visa charges an exchange fee in the amount of 1.15% + 0.05 dollars to 2.40% + 0, 10 dollars. Visa also charges a 0.14% transaction fee on every transaction.
Mastercard charges exchange fees ranging from 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 a technology that is still under development. However, blockchain developers have made stunning strides that are likely to be reckoned with by many soon.
However, having more efficient payment technology is not enough 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 reducing the pace of widespread adoption of Lightning Network technology, since appropriate economic incentives are needed for its widespread adoption. Then market agents will be ready to support this decision. Plus, there are precedents with unstable operation of the second layer network.
The task, as mentioned earlier, depends on several factors, as well as the overall network bandwidth. To go mainstream, the Lightning Network must increase its bandwidth to levels far beyond today. Now the network, according to some experts, is capable of supporting transactions up to 4828 BTC, which is equivalent to about $148 million. This is an insignificant amount compared to the huge billions moved through traditional payment systems. However, the direction seems to be correct as the value of Lightning Network bandwidth grows more and more over time.
#Lightning #Network #compete #Visa #Mastercard