The Lightning Network is often viewed as Bitcoin’s most powerful scaling solution, but Yours CEO Ryan X. Charles recently claimed there will be some issues with the rollout process for this layer-two scaling solution on an episode of Let’s Talk Bitcoin. Notably, Yours built their own implementation of payment channels for their social media application before making the switch from Bitcoin to Litecoin.
While Charles referred to the Lightning Network as “good technology” that will be helpful for enabling instant transactions and micropayments on Bitcoin, he also pointed out a number of caveats to the positive aspects of this new payments technology in the early days of its availability.
Onboarding Users to the Lightning Network Could Be Difficult
For the most part, the issue Charles sees with the Lightning Network has to do with going from no one using the new payment option to getting everyone onto the new platform. “Once you start working through the details and figuring out how it would actually work, you realize you don’t actually gain that much,” he said.
One of the key issues Charles pointed to was the fact that users will have to pay fees to get onto the Lightning Network.
“You’ve got to fund the channel with a lot more money than you’re planning on using for the individual payments, which on Bitcoin today is very expensive,” said Charles.
Of course, it should be noted that on-chain transactions still require fees as well, so the end result here is that opening a channel still makes those funds much more useful for everyday transactions. Users may view the Lightning Network as a sort of checking account where some funds are moved over as spending money.
The issue Charles described here is that users will only be able to take advantage of the micropayment capabilities of the Lightning Network once they’ve opened a channel and a limitation there is that fees on Bitcoin have grown rather substantially over the past year or two.
At the time the Let’s Talk Bitcoin interview was recorded, Bitcoin transaction fees were around $3. As fees rise, the amount of money that users will need to initially add to the Lightning Network may also increase. According to Charles, this may not be an issue once everyone has moved to the new system, but it could cause problems in the early days of adoption.
The Coffee Payment Example
To make his point about the problems associated with the Lightning Network’s rollout process, Charles used the example of someone purchasing coffee via the layer-two system.
If a consumer and a merchant open a Lightning Network channel between each other in the early days of the system, the merchant may not be able to access the $3 that is sent to them via the Lightning Network. If the merchant is not connected to any other Lightning Network nodes, then the only options are to send the $3 back to the consumer or anyone else who has a channel open with the consumer. If the merchant tries to close out the channel with the consumer and move the funds via an on-chain transaction, the entire amount will be eaten by fees.
The situation is obviously worse if the merchant accepts an on-chain transaction as they don’t have the ability to send it to anyone else for practically nothing via the Lightning Network.
The example provided by Charles assumes that neither the merchant nor the customer will have channels opened with other parties. It also assumes that the merchant is only going to receive one $3 payment through the Lightning Network, which means the merchant is not very successful in the first place. Those who decide to use the Lightning Network are going to open more than one channel and be able to transact with many parties, so the $3 will eventually be able to be sent to someone else on the Lightning Network.
Charles referred to this issue as an “important consequence” during the in-between phase before everyone is on the Lightning Network because users will be forced to close channels from time to time. He stated that this would not be a problem if everyone was already on the Lightning Network because channels can stay open permanently (in theory), so users never need to make on-chain transactions with those funds.
It should also be noted that the Lightning Network also leads to a situation where on-chain fees are paid less frequently even when everyone is not already on the network, so the benefits are seen from early on in the development of the layer-two system.
Will Users Open Channels with Merchants?
Later in the podcast, Charles questioned whether consumers would even want to open channels directly with a merchant.
“That first cup of coffee you buy is going to cost $100 because it doesn’t make sense to open a $3 payment channel,” said Charles. “When you want to use that $100 for something else, assuming everyone’s actually connected on the Lightning Network, what happens when that merchant goes down? I mean, who even is this merchant? Are you sure you want to open a $100 payment channel with this merchant you don’t even know?”
Of course, Lightning Network users will ideally have channels open with multiple other nodes on the network, so the $100 can simply be routed to one of the user’s other channels if the merchant becomes a problem.
Charles then made the point that consumers may be more likely to connect to larger nodes, such as bitcoin exchanges or payment processors, instead of connecting directly with the merchant. Such a system would still offer incredible improvements over the current methods in which Bitcoin payments can be made.
Lightning is not a panacea! We can't solve all problems. Our goal is to be a scalable layer 2 that enables devs to build on top of btc…
— elizabeth stark (@starkness) May 24, 2017
Charles also made the point that much greater on-chain capacity is also needed for Bitcoin to scale to a global payments network, which is also indicated in the Lightning Network white paper; however, the white paper also indicates that the layer-two system can mitigate the extent to which these increases are necessary.
“I don’t mean to diss it,” Charles clarified. “I feel that I’m being slightly negative. I do think Lightning Network is awesome technology, it’s extremely valuable, [and] will be very helpful to Bitcoin.”
Picture from Pixabay.