Bitcoin's Lightning Network: 3 Possible Problems (2024)

The Lightning Network is a second layer added to Bitcoin's network, enabling transactions between parties off the main blockchain—called off-chain transactions. Lightning Network has often been advertised as a game-changer in the cryptocurrency's evolution. It is designed to speed up transaction processing times and decrease the associated costs of Bitcoin's blockchain. The lightning network was conceived by two developers,Thaddeus Dryja and Joseph Poon in 2015.

Although the Lightning Network has experienced growth and development since its inception, challenges remain. Bitcoin's price fluctuations have prevented the crypto from becoming a widespread payment method for consumer and business transactions. Also, there are costs involved in using Lightning Network.

Here, we highlight what the Lightning Network is designed to solve and three problems that it faces. Also, we review recent developments that could impact and improve the network in the future.

Understanding the Lightning Network

As Bitcoin gains transaction volume, more are processed on its blockchain network. This presents problems because the blockchain, in its current state, isn't designed to scale or process the volume of transactions being made.

Bitcoin's Scalability Issue

The Bitcoin blockchain and network are designed to process one block about every 10 minutes. Transactions are sent into a work queue, where they are prioritized by how much the user paid in fees. The more transactions there are, the larger the queue is.

As a result, Bitcoin has faced a scalability issue, meaning there are challenges when the network tries to process more transactions simultaneously.For Bitcoin to process more data, the network needs to scale, allowing more transactions to be processed quicker and more efficiently.

This network latency has led to higher transaction fees as miners take longer to validate transactions because users pay more to prioritize them.

What It Is Designed to Do

The Lightning Network is a separate blockchain that works in conjunction with Bitcoin's blockchain. In a nutshell, the Lightning Network allows participants to transfer bitcoins between one another much quicker using payment channels. Channels can remain open for further payments or closed when a transaction is complete. Instead of waiting for the main network to get through its work queue for the payment to transfer (sometimes taking more than an hour), the Lightning Network lets users send and receive payments in seconds.

1. It Does Not Solve Bitcoin’s Transaction Fee Problem

Lightning Network is often touted as a solution to the problem of Bitcoin’s rising transaction fees. Its proponents claimed that transaction fees, one of the direct consequences of Bitcoin’s clogged network, would come down after the technology took transactions off the main blockchain.

But Bitcoin’s congestion is among several factors influencing its transaction fees. When the Lightning Network was integrated in 2018, expectations for reduced costs and faster transactions were high among users—but as the graph below shows, average Bitcoin transaction fees increased. There could be many reasons for this, but it demonstrates how ineffective the Lightning Network was at reducing fees.

Lightning Network Fees

In addition to standard on-chain transaction charges, users are charged for opening a channel with a routing node. The routing node operator charges fees for providing the Lightning channel to the main network. Fees consist of a base fee and a rate, both chosen by the operator. The base fee remains consistent unless manually changed, and the rate is a percentage of the transaction value.

So, a node operator could set the base fee at one satoshi and the rate at 0.1%. If a user wanted to send 1,000 satoshi via this node, they would need to pay 2 satoshi to the node (fees on the Lightning Network can be measured in increments of milli-satoshi, so the payments can actually be very small).

Lightning fees are generally low because hosting a node is a competitive endeavor. Fees must be low enough to attract users but high enough to bring some benefit to the host. If they are too low, there might be no reason to operate a node—if they are too high, users will likely choose a lower-priced node.

Interestingly (and regardless of node fees), by design, the Lightning Network incorporates fees to try and lower overall fees.

2. Remaining Online at All Times Makes Nodes Susceptible

Nodes on the Lightning Network are required to be online at all times to send and receive payments. Since the parties involved in the transaction must be online and use their private keys to sign in, it's possible that the coins could be stolen if the computer hosting the node was compromised.

Offline Transaction Risk

Going offline creates its own set of problems on the Lightning Network. According to Dryja, it is possible for one of the two parties from a payment channel to close the channel and pocket funds while the other is away. This is known as a Fraudulent Channel Close. There is a period to contest the closing of a channel, but a prolonged absence by one of the parties could result in the expiry of that period.

Malicious Attacks

Another risk to the network is congestion caused by a malicious attack. If the payment channels become congested, and there's a malicious hack or attack, the participants may not be able to get their money back fast enough due to the congestion.

According to Dryja, "forced expiration of many transactions may be the greatest systemic risk when using the Lightning Network."

If a malicious party creates numerous channels and forces them to expire simultaneously, which would broadcast to the blockchain, the congestion caused could overwhelm the capacity of the block. A malicious attacker might use the congestion to steal funds from parties who are unable to withdraw their funds due to the congestion.

3. Bitcoin's Price Fluctuations

The Lightning Network is also supposed to heraldBitcoin's viability as a medium for daily transactions. Customers are able to open payment channels with businesses or people they transact with frequently. For example, they can open payment channels with their landlord or favorite e-commerce store and transact using bitcoins.

However, Bitcoin has less traction as a mainstream payment method than as an investment instrument. The increase in transaction volume is primarily attributed to a rise in trading volume. In other words, Bitcoin's popularity with traders and investors increases its volatility—or price fluctuations—as well as congesting the network and influencing fee increases.

Recent Lightning NetworkDevelopments

There remain challenges with Bitcoin's Lightning Network and its ability to boost scale while simultaneously lowering transaction fees. However, the technology's core team has incorporated new use cases and has been researching additional features. As a result, there have been significant developments that attempt to improve the network.

Larger Payments Via Lightning Network

Lightning had initially limited channel size to a maximum of 0.1677 BTC, but in 2020, it was announced that the constraints would be removed so clients could have larger channels. These "Wumbo" channels are designed to increase the usage and utility of Lightning Network for consumers and businesses.

Crypto Exchanges

One of the most promising initial use cases involves cryptocurrency exchanges and financial services platforms. For instance, Kraken and Block's Cash App have integrated the Lighting Network. In September 2023, Coinbase CEO Brian Armstrong announced the exchange would integrate the Lightning Network. As one of the largest cryptocurrency exchanges, this is a significant development for the network.

Watchtowers

Watchtowers are third parties that run to prevent fraud within the Lightning Network. For example, if Sam and Judy are transacting and one of them has malicious intent, they may be able to steal the coins from the other participant by closing the channel.

So, say Sam and Judy put up an initial deposit of 10,000 BTC, and a transaction of 3,000 BTC has taken place in which Sam purchased goods from Judy. If Judy logs off her system, it is open to possible fraud. Sam could broadcast the initial state, meaning they both get their initial deposits back as if no transactions were done. In other words, Sam would have received 3,000 BTC worth of goods for free.

This process of closing the channel based on the initial state versus the final state in which all of the transactions have been done is called a fraudulent channel close. The watchtower monitors transactions and prevents fraudulent channel closes by forcing a close on the offending party. It broadcasts a revocation transaction and causes them to forfeit their channel balance to the other party.

The Bottom Line

The Lightning Network is a tool that could make a significant difference to Bitcoin's blockchain. However, the network might not solve all of the challenges Bitcoin faces. While improvements are being made, there's the potential for new problems within the cryptocurrency's ecosystem because it remains an ever-evolving technology.

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