The transaction fees on the Bitcoin network have skyrocketed to new all-time highs of over $30 in the past couple of months, which has led some to suggest that there could now be an opening for a cheaper, less congested alternative to the world’s most popular cryptocurrency.
Although on-chain transaction fees have priced some types of payments out of Bitcoin completely, various solutions to this issue are currently in development, with the Lightning Network being perhaps the most promising option.
What is the Lightning Network?
The Lightning Network is a system of smart contracts built on top of the base Bitcoin blockchain that allows for fast, cheap payments directly between two parties.
On a technical level, the Lightning Network is built on payment channels, which were envisioned by Bitcoin creator Satoshi Nakamoto in the early days of the project’s development. The basic idea here is that two people put some bitcoin into a multisig address and then sign transactions that alter the amount of bitcoin each party is able to redeem. The payment channel can be closed by either party at any time, and the last-signed transaction with the most up-to-date balances for both parties is the one that will be broadcasted and included in the Bitcoin blockchain.
From a less-technical perspective, the Lightning Network's use of payment channels effectively allows users to transact with each other directly rather than broadcasting their business to the entire world. By tracking their payments between each other on their own, the two parties are able to avoid expensive and time-consuming interactions with the blockchain. If there is some sort of dispute regarding balances on the Lightning Network, either party can send the last valid state signed by both parties to the blockchain, which acts as a sort of automated judge that cannot be corrupted or bribed. In other words, nobody can cheat or fudge the numbers.
With the Lightning Network, users are able to transact with anyone who is connected to their network of payment channels through multiple hops. It’s a network of payment channels rather than a way of enabling faster transactions between only two parties.
The key benefits of the Lightning Network include: drastically lower fees, instant payments (avoiding Bitcoin’s ten minute confirmation times), and the potential for improved privacy since these transactions are not stored in a public ledger forever.
Comparing the Lightning Network to Low-Fee Altcoins
There are many altcoins that have made their claims to fame by offering cheaper on-chain transactions when compared to Bitcoin. Here are the median transaction fees for some cryptocurrency networks on December 27, 2017 (according to BitInfoCharts):
Bitcoin: $22.99
Ethereum: $0.33
Bitcoin Cash: $0.05
Litecoin: $0.39
While there are currently cheaper alternatives to Bitcoin in terms of on-chain transactions, the Lightning Network should enable payments much cheaper than what is offered by these altcoins. In the past, the two co-authors of the original Lightning Network white paper have claimed fees on the layer-two scaling solution for Bitcoin will be effectively zero.
In addition to the lower fees, transactions on the Lightning Network can be accepted as valid instantly, meaning there is no need to wait for a confirmation via a new mined block before a payment can be accepted as valid.
There is also the potential for greater anonymity offered by the Lightning Network (or other, related systems such as TumbleBit), although there is still more work to be completed in this area.
Perhaps the most important factor to consider when comparing Bitcoin’s Lightning Network to low-fee altcoins is the higher liquidity, lower volatility, and relative longevity offered by the bitcoin asset. Most people would simply prefer to use bitcoin as money over an altcoin, which is the reason bitcoin has continued to succeed in the face of relatively higher fees.