Bitcoin’s Lightning Network: 3 Possible Problems – By Azgari Lipshy
The Bitcoin Lightning Network has been utilized for transactions and payments, but experts say that it has some flaws, such as problems with liquidity and transaction fees, that could cause problems.
“Just like in a marriage, you have to stick with your cryptocurrency investments through thick and thin, for better or for worse, wealthier or poorer, till death do you part—HODL.”
Thaddeus Dryja and Joseph Poon developed bitcoin’s lightning network in 2015. Its primary purpose is to enable transactions between the parties involved in the blockchain. The lightning network has been touted as a game-changer in the evolution of blockchain. It is specifically developed to speed up transaction processing and reduce costs associated with bitcoin’s blockchain.
While the lightning network has encountered significant development and growth since its creation, some issues stand unresolved. The price fluctuations of bitcoin have stopped it from becoming a global and acceptable payment method for business and consumer transactions. In this article, I will highlight the three main issues that bitcoin’s lightning network still faces.
1. The Price Fluctuations of Bitcoin
The creation of the Lightning Network is supposed to indicate the sustainability of bitcoin as a reliable channel for daily transactions. Clients can initiate payment channels with people and businesses they transact with regularly. For instance, customers can initiate payment channels with their preferred e-commerce platform or their landlords using bitcoins.
However, it will take a long time before bitcoins will acquire mainstream traction. The rise in bitcoin’s trading volume contributes to its increase in transaction volumes. This implies that bitcoin’s popularity results in two possibilities: it increases its volatility, and the price also fluctuates. Bitcoin’s volatility makes it difficult for organizations to adopt bitcoin as a mode of payment whenever they want to buy inventory from their suppliers or sell to their customers.
For instance, if an organization has to pay an invoice using bitcoin, the supplier will typically give the organization up to 30 days to pay. However, if bitcoin’s price increases by 20% in the next 15 days, the organization will have to create another 20% worth of fiat currency or other cryptocurrencies to convert to bitcoin before they can pay the supplier. This exchange issue primarily occurs because the business might pay their clients using a fiat currency instead of Bitcoin. Consumer transactions are another reason why this exchange risk occurs. This is because the wages and salaries of most people are not paid in Bitcoin. Thus, they have to change from a fiat currency to a bitcoin.
Consequently, the impact of the Lightning Network on decreasing bitcoin’s building scale and transaction fees may be limited. Many people and organizations have not adopted crypto as a payment method.
The creation of the Lightning Network is supposed to indicate the sustainability of bitcoin as a reliable channel for daily transactions. Clients can initiate payment channels with people and businesses they transact with regularly. For instance, customers can initiate payment channels with their preferred e-commerce platform or their landlords using bitcoins.
However, it will take a long time before bitcoins will acquire mainstream traction. The rise in bitcoin’s trading volume contributes to its increase in transaction volumes. This implies that bitcoin’s popularity results in two possibilities: it increases its volatility, and the price also fluctuates. Bitcoin’s volatility makes it difficult for organizations to adopt bitcoin as a mode of payment whenever they want to buy inventory from their suppliers or sell to their customers.
For instance, if an organization has to pay an invoice using bitcoin, the supplier will typically give the organization up to 30 days to pay. However, if bitcoin’s price increases by 20% in the next 15 days, the organization will have to create another 20% worth of fiat currency or other cryptocurrencies to convert to bitcoin before they can pay the supplier. This exchange issue primarily occurs because the business might pay their clients using a fiat currency instead of Bitcoin. Consumer transactions are another reason why this exchange risk occurs. This is because the wages and salaries of most people are not paid in Bitcoin. Thus, they have to change from a fiat currency to a bitcoin.
Consequently, the impact of the Lightning Network on decreasing bitcoin’s building scale and transaction fees may be limited. Many people and organizations have not adopted crypto as a payment method.
2. Nodes Become Susceptible After Remaining Online Every Time
Nodes on the lightning network of bitcoin are demanded to be online always so they can send and receive any payment swiftly. Since those transacting are also required to go online and use their private keys for signing in, the coins might get stolen if the nodes are compromised. However, cold storage is possible on the lightning network. It is considered the safest method of keeping cryptocurrencies.
The nodes going offline develop issues on the lightning network. One of them is that one of the people involved in a transaction might close the payment channel and steal the funds while the other party isn’t aware. This is generally known as the Fraudulent Channel Close. While there is a period the scammed party can make a complaint about the closed payment channel, the period might expire if the other party has been away for so long.
Another risk that the lightning network can face is the gridlock created by malicious attacks. If the payment channel becomes obstructed and a malicious attack occurs, the parties involved might not get their money back swiftly because of the congestion. The congestion could overwhelm the block’s capacity if a vicious attack generates many channels and makes them expire simultaneously. A malicious attacker or hacker might use the gridlock to steal money from people who can’t withdraw their money fast enough due to the gridlock.
Nodes on the lightning network of bitcoin are demanded to be online always so they can send and receive any payment swiftly. Since those transacting are also required to go online and use their private keys for signing in, the coins might get stolen if the nodes are compromised. However, cold storage is possible on the lightning network. It is considered the safest method of keeping cryptocurrencies.
The nodes going offline develop issues on the lightning network. One of them is that one of the people involved in a transaction might close the payment channel and steal the funds while the other party isn’t aware. This is generally known as the Fraudulent Channel Close. While there is a period the scammed party can make a complaint about the closed payment channel, the period might expire if the other party has been away for so long.
Another risk that the lightning network can face is the gridlock created by malicious attacks. If the payment channel becomes obstructed and a malicious attack occurs, the parties involved might not get their money back swiftly because of the congestion. The congestion could overwhelm the block’s capacity if a vicious attack generates many channels and makes them expire simultaneously. A malicious attacker or hacker might use the gridlock to steal money from people who can’t withdraw their money fast enough due to the gridlock.
3. Lightning Network Doesn’t Entirely Solve Bitcoin’s Transaction Fee Issue
A lightning network is usually presented as a solution to Bitcoin’s enormous transaction fees. The upholders of the lightning network claim that transaction fees would significantly reduce after transactions are taken off the blockchain. However, bitcoin’s congested network is among the numerous factors impacting its transaction fees. Also, bitcoin’s fee is a considerable part of the overall costs of the lightning network. Other fees include:
A lightning network is usually presented as a solution to Bitcoin’s enormous transaction fees. The upholders of the lightning network claim that transaction fees would significantly reduce after transactions are taken off the blockchain. However, bitcoin’s congested network is among the numerous factors impacting its transaction fees. Also, bitcoin’s fee is a considerable part of the overall costs of the lightning network. Other fees include:
. Open And Close Channel Fees: There are two parts to this fee. The first is the fee similar to bitcoin’s transaction fee and is used to open and close channels between the individuals transacting. While the lightning network allows for payments between the involved individuals, an opening deposit or transaction fee must be paid using on-chain.
The parties involved can then process numerous transactions between themselves. However, they must register a closing transaction fee for the settled price on the blockchain once they have paid the bill.
. Routing Fee: Apart from the open and closed channel fees, there are routing charges to transfer payments between channels. In theory, more participants should be attracted since the lightning network’s price is relatively low. However, if the fees for the routing between payments are too low, there might not be any charges the nodes will use to execute the payments.
The parties involved can then process numerous transactions between themselves. However, they must register a closing transaction fee for the settled price on the blockchain once they have paid the bill.
. Routing Fee: Apart from the open and closed channel fees, there are routing charges to transfer payments between channels. In theory, more participants should be attracted since the lightning network’s price is relatively low. However, if the fees for the routing between payments are too low, there might not be any charges the nodes will use to execute the payments.
This issue negates the approach being adopted by other cryptocurrencies to increase and improve their payment channels. For instance, Dash uses software plug-ins for businesses to download and use for free. The charges for Dash users are approximately $0.0005 for each transaction. Also, Dash payments are open to more than 150,000 businesses.
Final Thoughts
Bitcoin’s lightning network is still going through various changes. It’s still expected to make significant differences to bitcoin’s blockchain. However, the lightning network might not be the ultimate solution to bitcoin problems.
Also, as new enhancements and changes are affected in the network, there’s a huge possibility that other issues might arise in the cryptocurrency ecosystem. In the future, more research and development would need to be done to tackle these issues effectively!
About The Author
Azgari Lipshy writes about technology, yoga, and her solo travels worldwide.
SOURCE CREDIT:
https://azgarilipshyblog.wordpress.com/2022/09/16/bitcoins-lightning-network-3-possible-problems-by-azgari-lipshy/
Final Thoughts
Bitcoin’s lightning network is still going through various changes. It’s still expected to make significant differences to bitcoin’s blockchain. However, the lightning network might not be the ultimate solution to bitcoin problems.
Also, as new enhancements and changes are affected in the network, there’s a huge possibility that other issues might arise in the cryptocurrency ecosystem. In the future, more research and development would need to be done to tackle these issues effectively!
About The Author
Azgari Lipshy writes about technology, yoga, and her solo travels worldwide.
SOURCE CREDIT:
https://azgarilipshyblog.wordpress.com/2022/09/16/bitcoins-lightning-network-3-possible-problems-by-azgari-lipshy/
