Bitcoin's Lightning Network versus Visa and Mastercard. Bitcoin was the trigger for the process of decentralization of currencies around the world. As the first cryptocurrency to explode, BTC aims to facilitate peer-to-peer (P2P) transactions, especially when these cross national borders.
Nevertheless, if this functionality remains one of the points of the cryptocurrency, it is also one of its weaknesses. Indeed, the Bitcoin system can only support a low transaction rate, and its role as a payment mechanism is questionable.
To remedy this problem, the Lightning Network system was born and integrated with Bitcoin. The latter, despite its slow pace of development, remains a strong competitor against already established systems like Visa and Mastercard.
What is the Lightning Network System?
The blockchain on which Bitcoin is based is able to process up to seven transactions per second. Compared to the Visa system, capable of processing more than 24,000 transactions per second, this speed seems insignificant.
In addition, its slowness makes transactions much more difficult and increases costs to a very high level during certain periods. Also, some developers decided to solve the problem of low throughput and high transaction fees by creating Lightning Network.
It is essentially a Tier 2 scaling solution capable of processing transactions made outside of the blockchain. How Lightning Network works is relatively simple to understand. This consists of the creation of a P2P payment channel between two parties during a transaction.
Through this channel, each party can send an unlimited number of transactions almost instantaneously and at a reduced cost. The channel can be likened to a small account book on which users rely to pay for goods and services of all kinds without affecting the Bitcoin network.
Using Lightning Network, network users lock in a certain amount of Bitcoins to create their channel. Once the required amount of BTC is locked in the channel, recipients are able to charge the amounts they need in record time.
The Evolution of the Lightning Network System
The creation of the Lightning Network system is one of the answers given by developers to the evolution problem facing Bitcoin today. However, although the system is ingenious, its adoption is far too slow within the community.
From its inception until today, Lightning Network has over 87,000 payment channels for approximately 4,570 BTC locked with an estimated total value of over $111 million. A clearly insufficient advance when you think of the 19.1 million BTC in circulation with a market capitalization of more than 460 billion dollars.
It is still undeniable that despite the problems it faces, the Lightning Network (LN) system has the potential to surpass existing payment solutions.
For many, such a claim remains an illusion, as payment giants like Visa and Mastercard have had ample time to expand their influence across the world. According to expert estimates, the network set up by Mastercard can process up to 5,000 transactions per second.
As for the network, its transaction throughput is even more impressive. It is capable of processing up to 24,000 transactions per second. Visa CFO Vasant Prabhu even said in a recent interview that the network could, in theory, process up to 65,000 transactions per second.
The future of transactions
On the other hand, the data collected on the Lightning Network system clearly shows that the latter can go much further. Indeed, it is able to process up to 1 million transactions per second. It is therefore the most efficient payment system in the world in terms of transaction throughput.
For many cryptocurrency market specialists like Ovidiu Chirodea, CEO of Romanian cryptocurrency exchange Coinzix, the Lightning Network system represents the next step in the evolution of currency management.
According to him, the first stage was that of gold which was an effective store of value, but not very effective since it was not a practical medium of exchange. The second stage was that of fiduciary money which, if not an effective store of value, was an excellent practical medium of exchange.
The appearance of Bitcoin constitutes a new stage in the evolution of the financial market because the latter has created a new store of value. The subsequent invention of Lightning Network complemented Bitcoin by serving as a platform for it to also become a convenient medium of exchange.
What are the advantages of the Lightning Network system compared to the Visa and Mastercard system?
Privacy, ease of use, and resistance to censorship are the three great advantages that the Lightning Network system guarantees to its users. According to Max Rothman, head of cryptocurrencies and digital assets at global payment processor Checkout, the whole point of using cryptocurrencies is the anonymity they provide to their users.
Also, in order to be encouraged to exchange goods and services through crypto-currencies, it is important that the exchanges are done in a transparent and confidential manner.
The expert then specifies that the Lightning Network is a peer-to-peer type system. It is therefore up to both merchants and customers to ensure transparency in each of the transactions they carry out.
However, Rothman is not alone in speaking out about the potential of Bitcoin and the Lightning Network system. When asked about the subject, Bruce Fenton, a board member of the Bitcoin Foundation and candidate for the United States Senate in New Hampshire, was particularly optimistic about the Lightning Network system.
He thus said:
"The Lightning Network platform makes it possible for Bitcoin to carry out more transactions than other ordinary payment methods. In addition, Bitcoin is a cryptocurrency, that retains the advantage of being a more decentralized system and more resistant to censorship than centralized companies."
Lightning Network for the public good?
According to Fenton, while centralization remains a major concern for some of the users of the Lightning Network system, it could not affect the Bitcoin blockchain itself.
Lightning Network is essentially a payment platform that gives its users the opportunity to take advantage of a “cash” payment option for any type of transaction but in cryptocurrency. Better, during the transaction, there is no other party participating except those involved at the base, and no exorbitant fees.
For Chad Barraford, technical lead of the decentralized liquidity protocol THORChain, the Lightning Network system serves the interests of its participants much more than a public good. It is very different from other payment systems like Visa and Mastercard.
According to him, Visa company is a financial institution whose primary goal is profit and control of assets. He goes further by asserting that the company is under the orders of governments. As for Lightning Network, it is purely a public good and only exists to provide a fundamental service to every person on the planet who needs access to financial services.
Lightning Network: A perfect transaction system?
While it's true that Lightning Network has clear advantages when it comes to transaction throughputs, it also has some notable drawbacks.
At first, a question of habit will certainly arise as the LN system spreads throughout the world. Indeed, for many people, opening a Lightning Network-like crypto wallet and funding it may not be as easy or as ingrained as opening a bank account and then using a debit card.
Then, to feed his Lightning Network wallet, it is imperative that each user sends his BTC from a traditional Bitcoin wallet. In addition, the creation of a payment channel implies the complete locking of the funds inserted into it. Although these can be used freely to make transactions, the remaining funds can only be recovered after the channel is closed.
Also, the system does not provide complete risk protection, as offline transaction scams are always possible. One of the parties may decide to shut down a channel as soon as the other goes offline in an attempt to steal funds.
Although the use of third-party services serves in part to mitigate this risk, they create another problem in that they prevent people from entering the network.
Lightning Network definitely has a future, but it will take time for mainstream adoption. Bitcoin is currently experiencing some difficulties following the bear market and the inflation that affects the whole world.
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