The Lightning Network is Bitcoin’s second-layer scaling solution, and new applications which use its potential are appearing on the scene with increasing frequency. So what are the implications for the crypto sector in general and for CFD traders interested in digital coin forex transactions?
As major names such as Twitter are looking into the idea of using Bitcoin payments aided by Lightning, the scale of its potential impact is becoming clearer, especially as the white paper for the concept was only published as recently as January 2016. In the time since then, it has already made significant progress, but as it still only has a limited number of developers working on it, it is still in its infancy in terms of becoming a fully marketable proposition. As well as the finite resources in terms of development, there are also some questions to be asked regarding the economics, scalability and centralization issues surrounding Lightning.
Centralization
Promising greater scalability for Bitcoin, there is no doubt that the Lightning Network has something to offer. However, the level of centralization this may involve has raised eyebrows for some in the cryptocurrency community.
Tony Arcieri, Bitcoin expert and security researcher, explains: “Lightning’s architecture inherently favors economies of scale, leading many to suspect it would naturally converge in a small set of well-connected ‘hubs’ which will route the overwhelming majority of payments.” Arcieri also points out that these hubs should arise naturally from the economic and technical requirements of the network itself.
However, as fees must be paid in order to open an LN channel, individuals wishing to make use of the network may find it too costly to process single payments. In contrast, large companies would be able to afford having multiple channels open at the same time. In effect, this could mean that large numbers of transactions will be handled by a few major players, essentially leading to a situation where a certain amount of centralization is in place.
Supporters of the network argue that this outcome isn’t the only possible one, as Corné Plooy, a Lightning Network developer, suggests: “In the case of Lightning, some centralization will probably occur, but as soon as the centralization starts becoming harmful, it should be easy to set up new channels to route around the central party.”
Plooy goes on to say that by setting the right technical standards right from the start, potential problems in this area could be avoided, and a high level of privacy could be the place to begin.
User experience
One of the big challenges facing the wider adoption of cryptocurrencies is usability, and that is something the Lightning Network intrinsically aims to target. However, in order to achieve a big uptake amongst a general public base, the user experience must be smooth and yet still robust.
The Lightning Network UX is still perhaps in its early stages of development, but whether it is fit for purpose for a larger scale uptake to make Bitcoin more usable is a question many observers are asking.
An important contributor to the Lightning Network is Blockstream, and core tech engineer Christian Decker has opinions on the way forward: “The lack of polished user experiences has limited the reach of the Lightning Network in the past, and its wider consumer adoption, being perceived as a complicated technology that is accessible to tech-savvy users,”
“To tackle these issues we are trying to make Lightning itself more accessible with more advanced features that allow to hide some of the complexity behind better abstractions, and at the same time helping new developers find their way in the Lightning specification and implementations”, Decker clarifies.
The principal developers of the network, Lightning Labs, in collaboration with others such as Blockstream, are making efforts to improve the Network’s interface, but again developmental resources are proving to be a hindrance.
Big challenge
The Lightning Network has already made a great deal of progress, particularly when it is remembered that the beta stage only went live a year ago. Decker says: “The Lightning Network has seen an incredible adoption over the last year, that has exceeded our expectations.” In fact, the Blockstream Store running on the network has processed more than 1,800 transactions since it launched in January 2018. However, one of the biggest challenges facing the network is whether it is actually capable of providing enough scalability at a sufficiently high level.
Arcieri points out that the seemingly limitless scalability of the internet itself only works because there is not a central point of contention. He says that systems with a central point of contention are well studied in computer science, and Amdahl’s Law states that the scalability of such a system “is significantly less than what we might intuitively expect”.
“Lightning is often described (and modeled in simulations) as a limitlessly scalable network much like the Internet where interconnected nodes can scale independent of the performance bottleneck of the Bitcoin blockchain”, Arcieri explains.
If a centralized Lightning network offers poorer scalability, then the answer may well be a more decentralized network, which would suit many crypto enthusiasts and CFD traders alike.