Better trading conditions: This is how the Bitcoin Lightning network wants to make crypto trading more attractive

Lightning network scores with high speed

The Bitcoin Lightning Network was developed by crypto and blockchain researchers Joseph Poon and Thaddeus Dryja and was featured in the 2016 white paper “The Bitcoin Lightning Network: Scalable Off-Chain Instant Payments.” presented. The Lightning Network is a scalable Layer 2 solution of the Bitcoin blockchain on which transactions can take place at a significantly higher speed. According to WirtschaftsWoche, up to a million Bitcoin transactions per second should be possible – and thus significantly more payments than the credit card network of the payment provider Visa.

Lower fees than Bitcoin blockchain

In addition to the faster transaction speeds, the Lightning Network also boasts lower fees than those charged with the original blockchain. However, in order to complete Bitcoin payments via the economical network, a Lightning wallet is required through which the internet coins can be traded. As soon as users have connected to the Lightning network, a channel opens through which the sender can transmit the desired amount to the recipient – outside of the Bitcoin blockchain. As long as this channel is open between both parties, any number of transactions can take place between them. Only when trading has ended and the channel has been closed again will the traded Bitcoin units be pushed back to the original blockchain. Although the costs incurred also depend on the size of the transaction, with an average capacity of just over 200 USD per channel, the transaction fee in the Lightning Network is on average lower than 0.01 USD, as “Bitpanda” says. explained.

Wallets represent a barrier to entry

However, not everything that glitters is gold: This is what the crypto portal “Bitcoin2Go” points out. This was due to the fact that the network was not exactly considered beginner-friendly, especially at the time of its introduction, and that a certain technical affinity was necessary in order to be able to take advantage of the faster processing and the lower fees. The Lightning wallets are now largely easier to use. The crypto exchange Binance has already integrated the Layer 2 solution into its trading platform, and its competitor Coinbase also wants to add this function. However, the network has not yet sufficiently fulfilled its goal of carrying out everyday transactions profitably, Bitpanda added. The necessary wallets and payment intermediaries still represent a major barrier to entry.

The network can only function if it has sufficient liquidity. Since the Lightning network is a so-called “Prefunded System” Bitcoin2Go continues, this can only be successful if the appropriate funds are available in advance.

Vulnerabilities uncovered

Additionally, the Lightning Network is not fully protected from vulnerabilities, as a report from Bitcoin developer Antoine Ricard showed in October 2023. “One of the early identified vulnerability risks is that a transaction relay disrupts the one-way transmission of time-sensitive transactions by a counterparty with competing interests,” the programmer found during his investigation. This makes it possible for attackers to completely take over the channel capacities in the network. This type of attack is particularly dangerous because the load status of the network does not play a role. The vulnerability could also extend to the Bitcoin network, Ricard warned. However, so far there are no known cases in which the security gap has actually been exploited, and the network’s developers are constantly working on fixing such vulnerabilities.

It remains to be seen whether the Lightning network will be able to establish itself permanently in the crypto world and thus take the burden off the Bitcoin blockchain. With increasingly simplified usage options, for example through clearer wallet apps or implementation in existing crypto exchanges, the barriers to entry are at least lowered.