Lightning Network: Ready for the storm?

“With the rise of Bitcoin fees, Lightning Network is poised to thrive as the best Bitcoin scaling solution to date. It will be used more and more by business and for payments, but I am also very bullish on how the Lightning Network can be used by financial institutions to settle payments immediately, at low cost, in a trustless manner” Romain Rouphael, LNMarkets Co-Founder

As Bitcoin becomes increasingly popular, it is clear that people will look for ways to make cheaper on-chain transactions. The Lightning Network has been one of the solutions long proposed by Bitcoiners in order to solve Bitcoin’s scalability problems. However, more than six years after first being proposed and three years after the previous “High-Fee” cycle, Lightning has still yet to reach any meaningful adoption, and its status as the de facto scaling solution has been questioned. From the lack of incentives to bootstrap liquidity to the complexity of interacting with the protocol as a regular user, one could legitimately ask if the Lightning Network can live up to its ambitions?

Lightning Overview

The Lightning Network (LN) is the largest deployed Layer 2 payment channel network. A payment channel network consists of a series of individual payment channels, which, when strung together, enable rapid low-latency payments between participants in the network. Due to the off-chain nature of these payments (only the final summary hits the blockchain), the cost of payments on the LN is typically much lower than an equivalent payment on the base timechain. In order to be able to send funds on such a network, a user must open a payment channel to another participant on the network. Once the channel has been opened, both participants are able to send and receive a nearly unbounded number of payments off-chain, possibly never closing the channel on-chain. Similarly, in order to receive on the network, a user requires another individual to open a channel to the receiver. A participant can only send and receive up to the total amount of Bitcoin in a channel committed to by both parties.

This is where Routing Nodes come into play, individual nodes willing to allocate their Bitcoin liquidity to route payments between two parties not directly connected. However, many problems are facing would-be node operators today, such as the lack of economic incentives and the volatility of cash flows. Still, these are not the only problems the LN faces, slowing its adoption as an effective scalability solution. Although many improvements have been made, there is a growing interest for an improved user experience, better capital allocation, and a better understanding of potential attack vectors. Despite these uncertainties, the industry around the LN has grown to become one of the most exciting verticals to work on, with many companies at the forefront of innovation in unexpectedly diverse areas such as micro earnings, private messaging, and gaming.

When it comes to adoption, the LN has been steadily growing since its inception only three years ago with the help of a robust developer community. In this report, we’ll dive into the state of the Lightning Network in order to assess if it is ready for mass adoption as it becomes clear that the next “High-Fee cycle” is around the corner. In addition, we’ll take a look at some of the most disruptive innovations in the space with a particular focus on financial applications. The success or failure of LN is of paramount importance as it will determine the future of Bitcoin as a Medium of Exchange.