This article is about the lightning network. It does not cover the underlying technology in technical detail as majority of people do not care, nor should care about it. For technology to be adopted, it must simply function. You don’t care how the internet works – it just does. Same goes for anything else.
The arguments of BTC maximalists
We all know the arguments that you will hear from any BTC maximalist. Similar to any religious fundamentalist, they have been internalised and will be recited from memory:
BTC is the new gold
BTC is a store of value, Lightning is for daily transactions
BTC provides safety by removing third parties and having control over your assets
BTC allows banking for everybody
Some of it is true and some of it depends on how BTC Core decides to continue the development of BTC. I separate Bitcoin Core and the hard forked Bitcoin Cash, hence calling it core.
What is a blockchain
First you must know that a blockchain is nothing else than a distributed database, where all former entries are immutable and 100% verifiable to be true. Think of it as an Excel spreadsheet where you add rows with some information but will never be able to delete a row nor change it.
If you decide to use the rows as a means of transmitting currency, this is up to you and the belief of many others. But at the core of it, it’s nothing else than a database which records transaction information. Not financial transactions, but transactions in general. It can be anything that mutates a record in this database.
What gives BTC value
To put it simple. BTC’s value depends on the belief of people that they can do something with it. The notable difference to gold is that gold has real life applications. You are surrounded by gold. Most electronic devices cannot function without some form of gold used in the process.
One argument we often hear is that it is limited and will force people or governments to end the ever-expanding printing of new FIAT. Same as the gold standard once did for governments until it was abolished. BTC therefore can become the new gold standard.
As of now. The only thing that gives BTC any value is the belief that you can trade it for a FIAT currency of your choice or purchase limited goods with it. Again, it most likely will be exchanged into FIAT currency at the end by the receiving party. Since neither taxes nor other necessities such as rent, electricity or food can be paid in BTC.
Lightning Network - The only possible way of creating adoption for BTC
To have a wide spread real world application of BTC you require adoption and therefore usage. Which will bring you to the lightning network.
You will need the Lightning Network (LN) because at this moment in time, one block of data gets mined approximately every 10 minutes and contains roughly 1800 transactions. Due to the technical limitation of it not storing more than 1MegaByte of data, it cannot contain more than this. It’s simply impossible to write more characters into that block and therefore more transactions. The exception being upgrades to the code of BTC. This means as of today you are technically limited to 3 transactions per second (TX/s).
BTC technical limits hinder Lightning Network
LN itself states in their Whitepaper that BTC will need to handle roughly 156MB (page 56 - https://lightning.network/lightning-network-paper.pdf). Let this briefly sink in. 156 times the current block size is required, to “onboard” the people in this world, according to the developers themselves!
Let’s dive deeper into that number. Raising the block size to 156MB would allow a total of 40.4Mio transactions a day or roughly 14.8 billion a year. Or simplified, two transactions for every person alive, per year. Why does the Lightning Network state such a large figure? Because they assume the whole world will use BTC. This frankly is unrealistic. But why are two transactions needed? Because this allows every person on this globe to have one transaction to on-board and one transaction to off-board the LN.
The way LN works is that you transfer your BTC into the LN. You “lock” the BTC on the regular blockchain by transferring it to the LN and now can use it as you please in the LN. This allows for near instant transactions at the cost of a fraction of a cent. Contrary to handling transactions on the BTC blockchain this sounds great. You aren’t limited to 3 TX/s nor do you have to pay enormous fees (USD 1.55 median fee as of publishing- https://bitinfocharts.com/comparison/bitcoin-median_transaction_fee.html#3y). After all, who wants to buy a coffee-to-go for USD 2 and pay an additional transaction cost of USD 1.55.
The sad truth behind the Lightning Network
This all sounds great. It is. Except for a few things that BTC maximalists do not tell you – they can’t. Doing so would make their whole believe shatter to pieces by reality and most people don’t like admitting failures. Especially not when publicly shouting out how awesome BTC is and flashing laser eyes on Twitter or LinkedIN.
Remember the locked in BTC. Once you are in the LN the only way to verify your balance without trusting third parties is to off-board. This means you must close your channel and go back to the regular BTC blockchain. This way you gain access again and have full custody of your funds. In case of any dispute on the LN, you also must close that channel and will receive your BTC back. This is very important. Because once you are in the LN you will be most likely be subject to custody in one form or the other.
Transactions within the LN function via channels. To transact with someone on LN you need to have a channel with the receiving party. You can either do this yourself and open a channel with anyone you want to transact with, or you will use a major hub. In today’s world this means you either give cash and open the channel yourself. Or you use VISA which might have a channel already open with the merchant. Therefore, the usage of hubs is nothing you don’t already do today. You give your money to your bank and they will handle transactions for you. You have zero control on what the bank does with your money except for taking all your money out of the bank (closing the channel) or trusting the regulations. And regulations do not exist at the moment.
The gold standard - BTC repeats history
But at least with LN using BTC as underlying currency, governments couldn’t print more money and we are not dependent on centralized partners. Unfortunately this is simply not true. In fact it couldn’t be further from it. The only way to verify that your balance is yours is by leaving the LN. Similar to banks today, major hubs can hand out BTC as much as they want. The only thing that prevents that is people closing their channels. This would bring the system to it’s collaps. But this would already happen today if people ran to the bank and would withdraw their money as cash. Except that LN has an additional safety against that kind of “bankruns”. Remember that you are technically limited to 3TX/s without raising the block size?
As of today, the BTC Blockchain allows for only 259’200 TX/s per day or 94.6Mio TX/s per year. If every transaction would be reserved for onboarding the LN and nothing else. Not even than it would be possible to onboard a third of the American population.
This brings you to the sad reality. It is technically and therefore mathematically impossible to onboard and offboard more than 40Mio people once per year. This simply theoretical scenario excludes any non-LN transactions. It excludes the fact that maybe you need to top-up your wallet once a month, like you do with your regular bank account etc. All of this incentivizes users to never use the underlying layer and fully trust into the existing major hubs in the LN.
Not only that. But the enormous transaction cost further makes BTC unfeasible for what it was intended for. Providing billions of people access to the banking system, who are currently hindered by it due to simple cost. Half the world’s population lives with less than USD 5 per day. How should they afford an average transaction cost of USD 1.55. This excludes any additional cost that may occur in the LN such as: channel opening fees, watchtower fees to monitor funds and prevent abuse etc.
Lightning Networks achievements
What did the LN achieve? It copied the currently working banking system with all it’s flaws and make it use BTC. It is subject to centralized partners who will use KYC and large hubs can easily blacklist any of your transactions. Further any large provider can do whatever they want if none of them settles. Like the gold standard once disappeared, BTC standard can disappear. Simply due to technical limitations. At least in that regard BTC would be like gold. You first use it as safety, then you lock it away and lastly you make it obsolete by removing the access to it.
Congratulations BTC. You became the opposite of what you were intended to be “A purely peer-to-peer version of electronic cash”.
