Irrespective of the increase in popularity and discovered potential blockchain platforms with all their glory and power saw a significant downfall when the networks were brought down to their keens due to overwhelming transaction load. The scalability of the blockchain platforms has been the biggest hurdle in the path to mass adoption of blockchain-based solutions. However, with time, several solutions have been proposed and are in action to overcome this issue. One of the most popular approaches is the Layer-2 solutions.
Layer-2 is an umbrella term for solutions designed to help scale the blockchain-based applications by handling transactions off the blockchain platform’s Mainnet (Layer-1) but ensuring to utilize the benefits of the robust decentralized security model of the Mainnet. Layer-2 solutions are designed to increase the speed and efficiency of blockchains in terms of throughput without tampering with any of the original decentralization or security characteristics integral to the original blockchain.
Bitcoin is considered the pioneer of popularizing blockchain-based crypto solutions to the masses. However, the Bitcoin community noticed the scalability problems inherent in its design from its very early days. Bitcoin network has a throughput of up to 7 transactions per second (TPS). This rate is relatively low as compared to its opponents. To increase the speed and efficiency of the Bitcoin network, multiple solutions are proposed that can be grouped as Layer-1 (e.g. sharding), Layer-2 (e.g., side-chain solutions), and Layer-3 solutions (e.g., blockchain-based apps that merge different services into a single platform, such as DeFi apps). The Lightning Network is one of the popular Layer-2 initiatives for the Bitcoin Network.
The conception that Bitcoin is slow and not suitable to be used as a currency is false. The mainnet doesn’t need to be Lightning-fast because block size increase will sacrifice the security & decentralization of the Bitcoin network. Anyway, would you prefer to carry all of your assets in your pocket or would you rather store the majority of it somewhere safe and carry some pocket money with you?
Lightning Network is designed for day-to-day transactions and can scale almost infinitely. Compared to Visa/MasterCard standard, LN surpasses its competitor in any possible aspect.By bitbit21
What is the Lightning Network?
Lightning Network is a lightweight software solution for scaling public blockchains and cryptocurrency interoperability. It is a decentralized system for instant, high-volume micropayments to eliminate the risk of delegating custody of funds to trusted third parties.
Bitcoin is the world’s most widely used and valuable digital currency. It allows anyone to send value without the need for a trusted intermediary or depository. Even though Bitcoin features an advanced scripting system that will enable users to program instructions for funds. However, there are certain flaws in Bitcoin’s decentralized design that plunges its performance down. One of the significant drawbacks is the slow transaction confirmation time. Furthermore, micropayments, or payments less than a few cents, are inconsistently confirmed, and fees render such transactions unviable on the network today.
The Lightning Network targets to solve the problems of slow speed and high costs. It is one of the first implementations of a multi-party Smart Contract using Bitcoin’s built-in scripting. The Lightning Network software was developed at MIT’s Media Lab initially focused on Bitcoin, but it can work on all Bitcoin-like blockchains. Built on top of the Bitcoin blockchain, the Lightning Network is made up of a system of channels that facilitates users to move money between one another without needing to use Bitcoin’s blockchain for verification of the transactions.
What areas does the Lightning Network aim to power?
The Lightning Network aims to provide fast and cheaper payment transactions and resolve scalability issues of the Bitcoin network.
Instant Payments: Bitcoin combines transactions into blocks spread out ten minutes apart. Payments are widely regarded as secure on bitcoin after confirmation of six blocks or about one hour. On the contrary, in Lightning Network, payments don’t need block confirmations and are instant and atomic. Hence, Lightning can be used at retail point-of-sale terminals, with user device-to-device transactions, or anywhere instant payments are needed.
Micropayments: micropayments have the potential to open new markets. Lightning enables sending funds down to 0.00000001 bitcoin without custodial risk. The bitcoin blockchain currently enforces a minimum output size many hundreds of times higher and a fixed per-transaction fee, making micropayments impractical. Lightning allows minimal payments denominated in bitcoin, using actual bitcoin transactions.
Scalability: The bitcoin network will need to support orders of magnitude higher transaction volume to meet demand from automated payments. The future increase in internet-connected devices needs a platform for machine-to-machine payments and automated micropayment services. Lightning Network transactions are conducted on the blockchain without delegation of trust and ownership, allowing users to run nearly unlimited transactions between other devices.
Low Cost: By transacting and settling off-blockchain, the Lightning Network allows for exceptionally low fees, which allows for emerging use cases such as instant micropayments.
Cross Blockchains: Cross-chain atomic swaps can occur off-chain instantly with heterogeneous blockchain consensus rules. So long as the chains can support the same cryptographic hash function, it is possible to make transactions across blockchains without trust in third-party custodians.
How does the Lightning Network Work?
Lightning Bitcoin is a Proof-of-Stake Bitcoin fork focused on optimizing cheap, fast on-chain transactions. The Lightning Network uses the actual Bitcoin blockchain transactions and its native smart-contract scripting language to create a secure network of participants offered transactions at higher volumes and speeds.
Bidirectional Payment Channels: The protocol works by creating a peer-to-peer payment channel between two parties willing to transfer funds. Once the channel is established, it allows the two parties to send an unlimited amount of almost instant and cheap transactions. The channel acts as its little ledger for users to pay for even smaller goods and services without affecting the Bitcoin network. To create a payment channel, the payer must lock a certain amount of Bitcoin into the network. Once the Bitcoin is locked in, the payee can invoice amounts of it as they see fit. If the customer wants to keep the channel open, they can add Bitcoin consistently. In Lightning Network, channels are bi-directional, i.e., both parties can transact with each other. When the Bitcoin that initiated the channel is spent, the payer can opt to close the channel or refill it. Once a channel is closed, all transactions will be recorded to the main Bitcoin blockchain. This strategy speeds up the transaction speed. The Lightning Network creates a smart contract between two parties coded with agreement rules upon creation and cannot be broken. Once the preset requirements are met, the contract is automatically fulfilled without the involvement of any third party. The Lightning Network anonymizes transactions within a payment channel once validated. All anyone can see is the total transfer of value, not the individual transactions.
Lightning Network: Creating a network of these two-party ledger entries makes it possible to find a path across the network similar to routing packets on the internet. The nodes along the path are not trusted. The payment is enforced using a script that enforces the atomicity (either the entire payment succeeds or fails) via decrementing time-locks. The Lightning Network does not require cooperation from the counterparty to exit the channel. Both parties can unilaterally close the channel, ending their relationship. Since all parties have multiple multi-signature channels with many different users on this network, one can send a payment to any other party across this network. By embedding the payment conditional upon knowledge of a secure cryptographic hash, payments can be made across a network of channels without the need for any party to have unilateral custodial ownership of funds. The Lightning Network enables what was previously impossible with trusted financial systems vulnerable to monopolies. Without the need for custodial trust and ownership, participation on the network can be dynamic and open for all.
Blockchain as Arbiter: The Lightning network employs the strategy that it is entirely possible to conduct transactions without restrictions outside the blockchain. Off-chain transactions can be trusted to enforce the blockchain, considering they end up on the mainnet once payment channels are closed. The mainnet is the arbiter of all transactions. While off-chain protocols have their own ledger, that ledger always integrates back into the main chain, which is core to the Lightning Network’s design. If there is a main chain to build off, off-chain protocols can exist.
Types of transactions on the Lightning Network
The Lightning Network supports both on-chain and off-chain transactions. It enables two parties to lock up bitcoin in a multi-sig address, using an on-chain transaction called a funding transaction. The parties can repeatedly adjust the balances within that address using an arbitrary number of off-chain transactions. These transactions are instant and free. When the two parties are finished transacting, they can settle their balances using another on-chain transaction. The Lightning Network allows a potentially infinite number of transactions to be compressed into two on-chain transactions, drastically reducing the transaction fees and wait times.
How to set up a Lightning Network Node?
Nodes are the most critical part of the blockchain infrastructure as they are responsible for assembling the blocks of data to be stored on the blockchain. A Lighting Network is a Layer-2 solution for Bitcoin technology that enables the Bitcoin blockchain to conduct its transactions more effectively and efficiently. Transactions conducted on Lightning Networks are faster, less costly, and readily confirmed on the Bitcoin blockchain. A Lightning node acts as a gateway into the Lightning Network helps with interacting and connecting with both Lightning and the bitcoin network. At least one running node is always required to explore the Lighting Node technology. Luckily, you can run a node regardless of the network you are using. This article will explain how to set up a lightning network node.
Step 1: Get the Hardware and Equipment
Well-functioning hardware is required for running a reliable lightning node. The minimum hardware requirements for running a lightning node are as follows:
- Raspberry Pi 4 Model B, 4 GB
- Raspberry Pi 4 case, including the fan
- 32 GB SD card and adapter
- Samsung T7 Touch Portable Solid State Drive (SSD), 1 TB for data storage
- 5FT Ethernet cable
First, assemble the Raspberry Pi case, then install the heat sinks and the fan. Raspberry Pi is not a compulsory requirement to run a Lightning network node. You can run the lightning node on your computer as well. However, doing so makes your node more vulnerable to digital attacks.
Step 2: Install the Software
After the hardware installation, the next step is to install the RaspiBlitz in the Raspberry Pi and write it on the memory card. Navigate to the official RaspberryPi website and download the operating system. Then download the flasher from here. Next, flash the OS file onto your microSD card and insert this into your node. Using the Raspberry Pi Imager is the best way to install the software. If you are using a regular PC, use Umbrel. You can refer to this video guide for more help on using the Raspberry Pi Imager. You can also refer to the GitHub repository for more details on the RaspiBlitz Lightning implementation.
Step 3: Connect to the Network
After installing RaspiBlitz, it will give you a step-by-step guide on how you will set up a wallet and load it. After syncing up your wallet, you will need to download the Bitcoin blockchain. This process might take several hours and sometimes a couple of days. After the download, open a lightning channel and connect to a node. You can now start sending and receiving Bitcoins from your node.
Step 4: Set Your Fees and Create Channels
Set your lightning fee for forwarding transactions after the Lightning Network is downloaded and connected to your node. You can also connect to other Lightning nodes and find Lightning channels. Once your Lightning node is operational, open one or more payment channels to another high capacity and reputable node to route payments through them. If you don’t, your node will not send payments.
A high capacity node is a node with large numbers of bitcoin locked into it. You can visit the Lightning Node Explorer for finding high-capacity nodes.
Why Should You Have a Node?
When running a Lightning node, you have full ownership of your funds. Furthermore, lightning nodes have complete blockchain information stored. Because of this, one will not need intermediaries to keep your coins for you, i.e. a custodian. Moreover, the users running lightning nodes are not just a user of Bitcoin but are also active contributors to its blockchain. You can also earn some Small Bitcoin Units when you pass lightning payments across the Lightning Network. Therefore, running a lightning node can be profitable.
Can you make money with Lightning Network?
Lighting Node provides an opportunity to earn in two primary ways. One is by routing payments for others. And the other is by selling liquidity which means that people can get paid if channels are created.
When a node forwards payments, one of its channels increases in local liquidity while the other decreases. It usually happens when the payer sets the payment route or if automatic path-finding is involved. Path-finding decisions are determined through various factors. For instance, a manual route has not been defined for the payment by the payer. The path-finding algorithm determines a node to be used for forwarding payments by evaluating health metrics node uptime, rate/fee, longevity, etc. Better the channel better the chances of getting payment of others to get across your channel, leading to the collection of the fee at the given rate.
After evaluating the health of a channel, the next step is to set the fee rate. It usually is determined by the channel’s historical activity. Predicting how funds will flow through a brand new channel is not easy. One option is to keep the fee rate low (50ppm or less, which means for every 1 million satoshis (smallest unit of Bitcoin) routed, you will earn 50) on newer channels for at least a month. This way, you can find out if it drains one way or another. Channels that drain (funds flow from the outbound to the inbound side) are where the most significant opportunity for fee collection is found.
A typical order of operations:
- Open Channel.
- (optional) Rebalance channel so that it has some remote liquidity as well (if a brand new node, can use LOOP).
- Set ppm to as low as you feel comfortable to encourage activity in the channel.
- Wait 30 days (my personal opinion, you can experiment with this).
- Use ThunderHub to determine if the channel drained or not. The other channels you have and the quality of your peers do influence the probability of this. Just because you don’t see activity on a channel doesn’t mean it is a bad channel. It may just mean that your other channels aren’t sufficient to be able to fully route the payments that the network is looking for.
- After the channel drains, rebalance back into that channel and increase the fee rate based on how much you rebalanced, and the fee rate of the rebalance. Then add a premium if you wish to make a profit.
Another way is to take time to determine which channels interact the most. Use Lightning public databases such as amboss.space or 1ml.com to see what channels your peers also have. Look at your peers. What fees do they set? What is their average channel size? How long have they been around? Remember, channels to merchants and services tend to drain faster. You will also need inbound liquidity to compensate for these routes on your other channels. Try to have the total outbound and inbound liquidity of all of your channels relatively even if you can to encourage movement.
The ultimate goal is to have a node where the channels flow in both directions relatively evenly. To accomplish this is very challenging but very rewarding. The more this happens, the less you have to do a manual rebalance, which means fewer forwarding fees that you have to pay. Experimentation is key. Also, remember that running a suitable routing node requires capital. As the price of bitcoin increases, the value of lightning channels also increases. This is great for the lightning network as nodes with smaller sat channels are likely to route more as the price goes up. However, it is a good idea to determine your initial capital and plan accordingly.
Suppose you have a well-connected routing node with 100,000,000 sats (satoshis). Say you are looking to open channels to increase your node’s capacity. You realize that a channel from your node has a higher relative value than a channel from a poorly connected node.
There are always nodes available in the network that are willing to pay you to open a channel with them. Additionally, there are also services you can participate in that allows you to sell your liquidity. The most popular tool for this is Lightning Pool by Lightning Labs. This is for those running LND. The GUI for this product is in Lightning Terminal, also known as LiT. In LiT, you can go to the pool menu and set parameters for which you would like to be paid to open channels to those looking to buy inbound liquidity from well-connected nodes on the network.
Your Node is an Investment
One of the questions that may arise to a newbie to the Lightning Network is that it would require a lot of capital to run a node, and additionally, not much would be earned from the fees.
The answer to this is even if you have very few sats to allocate towards a node, you should still run a Lightning node. Whether through Voltage, a custom raspberry pi implementation (mynode, embassy, Umbrel, raspiblitz, raspibolt), or manually. The simple reason is that we don’t know what the future holds. There could be a point in the future where a node started in 2022 may be sought after by big institutions to buy your node from you possibly. Having a reliable node that has been around for years could benefit future interested parties and routes on the network.
Global Adoption of Lightning Network
A report published by Arcane Research details the exponential growth of Bitcoin’s lightning network from infancy to its current state of global adoption. Although officially launched in 2018, the Lightning Network did not experience much usage growth until it went parabolic in September 2021 – directly attributed to El Salvador’s inauguration of Bitcoin as legal tender. El Salvador’s President Nayib Bukele doubled down on his commitment to national Bitcoin adoption by launching the Chivo wallet, enabling today over 3 million onboarded Salvadorians to pay through the Lightning Network on their mobile smartphones.
This announcement alone sent shockwaves throughout the remittances industry, explicitly showcasing a major pivoting from traditional payment services to permissionless peer-to-peer networks. As the composition of payments continues to increase as new users obtain access to Lightning payment, it is inevitable to see soon the increased utilization of Lightning in daily tasks such as merchant payments, bill payments, household expenditures, and of course, remittances.
According to Arcane Research, Lightning adoption in El Salvador could reach approximately 90% of the population by 2026 – suggesting a monthly volume growth of ~$650 million and 20 million transactions towards household expenditures and remittance payments. On a global scale, all eyes are on the success of El Salvador’s approach. If so, other countries will most likely follow suit, especially those with hyperinflation stricken economies, high unbanked/under-banked populations, strong dependence on the U.S. dollar, and deep reliance on remittances.
With these economic conditions in mind, Arcane Research composed a list of countries with such qualities. It is estimated that these countries have a combined population of 850 million people, 650 million of which are currently unbanked. If 10% of the estimated population were to adopt Bitcoin before 2030, 50 million new Lightning Network users would be converted by the end of the decade.
Two of the most important statistics to determine the growth of the Lightning Network are the number of lightning nodes and the number of lightning channels running on the network. The increase in these numbers allows for more capacity on the network. At the time of writing, there are approximate:
- 20,319 Lightning Network Nodes
- 85,943 Lightning Channels
- An average Lightning Network Channel Size of 0.04036598 BTC
- Total Value locked in Lightning Network is $135.897M (3.48K BTC).
What’s next for the Lightning Network?
Both Bitcoin and Lightning networks are here to stay. The question is no longer if but when will retail users execute micropayments to purchase a gallon of milk at their local grocery store or pay their monthly phone bill. Visionaries such as Jack Mallers and Jack Dorsey attempt to make this a reality through their respective companies: Strike and, of course, Twitter. Strike is putting lightning network utility directly in the hands of retail users (as seen in El Salvador). Now individuals have the fiat to lightning on-ramp needed to send money to loved ones abroad – without the need of an intermediary service like Western Union or MoneyGram!
To further the adoption of the lightning network in the realm of social media, Twitter has implemented Strike’s services into a new tipping feature that allows Twitter users to send micro-transactions of Bitcoin to one another. This single-handedly may very well revolutionize the way we view the remittance market. People, no matter where they’re located in the world, now have access to an open, private, tamper-proof, decentralized financial system where all one needs is a Bitcoin address (or a Twitter handle) and wifi connection!
The implementation of micropayments on a global scale will gradually transition from nascent use-case to a standard form of transactional practice. Furthermore, as blockchain ecosystems continue to develop, these methods of payments will further stimulate the creation of a robust gig, machine economy – enabling true pay-as-you-go capabilities no matter where you are in the world and really bringing the usage invoiced to a whole new and potentially very granular level!
Lightning network as Layer-2 solution is an ambitious project with a golden aim of facilitating Micropayments and cheaper transactions over the Bitcoin network. The more the Lightning Network increases in capacity, the more it can scale Bitcoin transactions and increase its use case as a day-to-day payment system. Currently, many view Bitcoin as a store-of-value and investment opportunity, but the Lightning Network may be able to make Bitcoin’s use as a payment system a reality.
From the perspective of investing in the Lightning network, we would say that starting running a node, learning how channels work, and learning anything that involves Bitcoin and the Lightning Network will set you apart and benefit you right now. Having your node means sovereignty. Like with base layer bitcoin, a lightning node that you control is extremely powerful outside of any desire for profit.
Everyone and anyone who is choosing to run a node is strongly encouraged not to run a node strictly based on profit projections to re-evaluate the actual value of running a node. Educational value, future value, sovereign value, etc., are all worth it today without any notion of profit.
The answer to the question, “Is investing in Lightning Nodes Profitable?” the answer is yes. However, the profit earned may not always be measured in satoshis.