Lightning Meetup in Kyiv: What Will Happen to Bitcoin After Lightning Network


On May 12, Ukraine’s capital of Kyiv hosted Bitcoin Lightning Meetup, where the Lightning Network’s team presented their protocol’s advantages and spoke about its possible impact on bitcoin and global economy. In this article the basic implications will be explained.

What is Lightning Network?

For most people interested in development of cryptocurrency economy and other blockchain-based systems, Lightning Network is an add-in protocol for bitcoin’s blockchain enabling bitcoin exchanging via designated channels opened between users. Such channels resemble a chat where users may send each other transaction messages without recording the entire log into bitcoin’s blockchain until one of them decides to ‘cash’ the money, i.e. move them beyond Lightning Network.

Disadvantages of current bitcoin infrastructure that the off-chain solution may solve are described on the project’s website:

“The Lightning Network is a decentralized system for instant, high-volume micropayments that removes the risk of delegating custody of funds to trusted third parties. Bitcoin, the world’s most widely used and valuable digital currency, allows anyone to send value without a trusted intermediary or depository. Bitcoin contains an advanced scripting system allowing users to program instructions for funds. There are, however, some drawbacks to bitcoin’s decentralized design. Transactions confirmed on the bitcoin blockchain take up to one hour before they are irreversible. Micropayments, or payments less than a few cents, are inconsistently confirmed, and fees render such transactions unviable on the network today. The Lightning Network solves these problems.”

Implications for Bitcoin

Bitcoin payments will become instantaneous. As I wrote above, users may open a channel where each of them stores some amount of money representing a finite sum that each of them intends to spend within the channel.

The assets may be sent instantly, and the receiving party gets a new ‘receipt’ upon each payment. This receipt may be published it Bitcoin network at any time, but it would entail commission for miners, so, theoretically, he or she may opt to move the amount to the blockchain as late as possible. The second conclusion on user incentives lies in the fact that the fewer open channels there are, the fewer fees are to be paid in the future. For that reason, there should not be too many open channels.

Network Effect 2.0. There is a well-known theory of six handshakes, which implies that anyone on Earth knows anybody else through six other people in a chain. It may seem preposterous when it comes to the entire humankind. Anyways, in case of affinity groups, like cryptocurrency users, which resemble a network structure, it may be true that everyone might know everyone. Creators of Lightning Network decided to make use of the phenomenon and provided an opportunity to pay each other via other users through a chain of open channels. Each intermediary user in the chain may ask for a fee for transfer of funds, and selection of a way through the system-to-be may be automatically optimized to prefer lower fees.

This makes payments processing truly decentralized within a peer-to-peer network, while free competition incentivizes cutting of fees. This would decrease the number of open channels and save significant money on payments servicing.

Bitcoin will be Scaling. Nowadays, bitcoin network’s biggest problem is the fact that the number of transactions per period of time is limited, which makes the system’s overall efficiency much lower than that of centralized systems like Visa. Present-day limitations partially move upwards due to increase of maximum block size up to 2 megabytes and implementation of Segregated Witness system. However, that would hardly suffice as bitcoin grows more popular. It halts many potential investors, and prevents them from entering bitcoin businesses. While there are polar opinions in regard of block size increase (some even think that 2 MB isn’t enough), Lightning Network developers believe that block size increasing can’t last forever, as it would significantly increase transaction cost as a result of higher requirements to communication and mining equipment efficiency.

“Lightning Network transactions are conducted off the blockchain without delegation of trust and ownership, allowing users to conduct nearly unlimited transactions between other devices,” reads the project’s website.

Notably, bitcoin’s blockchain in that case will act as a guarantor, which accepts only major payments or a sum of micropayments.

Right Here, Right Now. The system’s next greatest feature is cheap processing of lots of infinitely small transactions. The use of so-called ‘micropayments’ is in the fact that any member of the network will be able to pay for services, like power or leasing, over the course of the usage, with no need of pre-payment. It may become one of the pillars of the forthcoming ‘sharing economy’. Notably, an economy based on microtransactions may be much more effective as liquidation of pre-payments will set previously frozen amounts free. These amounts may be used for any purpose their owner may want, and even be invested in a business. Even though sequences of such economic arrangement haven’t been well-studied yet, and bitcoin acceptance rate will hardly cause Lightning Network to become a global system in the next few years, the opportunities seen at the first glance amaze professional economists.

Beyond Bitcoin. Importantly, the development may be compatible with any blockchain-based system where current improvements of Bitcoin are implemented. Apart from that, there may be multicurrency channel chains. For instance, if there’s a bitcoin channel between Alice and Bob, an Ethereum channel between Bob and Carol, and another bitcoin channel between Carol and David, then Alice will be able to send bitcoins to David, provided all members are online.

Lightning Network’s presentation is available here:

Soon I hope I will write down the audio record of the meetup, so that everyone could read what it was all about. Stay tuned!

by Eugene Muratov

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