BETA
This is a BETA experience. You may opt-out by clicking here

More From Forbes

Edit Story

Bitcoin's Lightning Network Could Play Havoc With The Bitcoin Price

Following
This article is more than 5 years old.

Bitcoin's Lightning Network has been hailed as the saviour of bitcoin transactions — the thing that will allow the clunky and encumbered original blockchain-based cryptocurrency to compete with the likes of more nimble bitcoin cash, dash coin, lite coin and ripple.

On bitcoin forums many talk of the Lightning Network as though it will solve all of bitcoin's problems, making transactions quick, cheap and easy. One question few have asked is, if the Lightning Network grows into a widely used bitcoin modification, what it will do to the bitcoin price — something that is closely linked to miners' fees and transaction costs.

The Lightning Network, first proposed by Thaddeus Dryja and Joseph Poon in a 2015 white paper, creates a layer on top of the bitcoin blockchain, where transactions can be passed back and forth before being added to the underlying blockchain.

When sending a Lightning payment, two parties deposit the funds at one bitcoin address, a so-called "channel," in which they can exchange funds a limitless number of times.

This maintains bitcoin's security but means small, regular payments don't need to be added to the underlying blockchain until the channel is closed.

Many bitcoin traditionalists like the Lightning Network due to its preservation of bitcoin’s gold-like features, leaving the block-size limit unchanged but allowing a far greater number of payments to take place.

The concept has been backed by bitcoin evangelist Jack Dorsey, the founder of micro-blogging site Twitter and U.S. payments processor Square.

The question of block size has previously ripped apart the bitcoin community, resulting in a hard fork last year and the creation of bitcoin cash, which can support a current block size of 32 megabytes, compared to bitcoin's one megabyte.

The block size determines how many transactions can be confirmed when each new block is mined and added to the chain.

Bitcoin's transaction troubles peaked in December last year when a booming price and a global cryptocurrency craze sent miner fees and transaction costs spiralling — at worst hitting an eye-watering $50 per transaction.

Though transaction prices have since fallen back, as adoption grows it's feared fees will increase with them.

Bitcoin transaction fees peaked in December last year and have since fallen back.

BitcoinFees.info

When the number of possible bitcoin transactions are compared to other cryptocurrencies and traditional payment methods, the importance of something like the Lightning Network becomes clear.

Bitcoin currently processes about three transactions per second, while the Visa network can handle more than 3,600 every second.

Ripple can do around 1,500 transactions per second, while bitcoin cash tops out at 60, with lite coin around 56, and dash 48.

Ethereum, whose blockchain was last year overwhelmed by surge in demand for crypto-meme CryptoKitties, can process some 20 transactions per second.

What will the Lightning Network do to the bitcoin price?

Mass adoption of the Lightning Network would be one of the biggest changes to how bitcoin works in the real world since it was first conceived almost a decade ago.

And this could mean big things for the bitcoin price, which, while up significantly on 12 and 24 months ago, is heavily down from its December 2017 highs.

Bitcoin prices have risen along with use — as more people send, receive and mine bitcoin the price has risen. However, if a large volume of bitcoin transactions happen "off-chain" there will be a smaller reward for miners who, once the last bitcoin is created well into the next century will entirely depend on transaction fees for income.

"If overall transaction levels remain constant but shift to the Lightning Network, then this should result in reduced mining fees, said Garrick Hileman, head of research at Blockchain.com and co-founder of Mosaic.io, a platform for market intelligence on cryptocurrencies. "Indeed, many miners in the bitcoin scaling debate opposed the introduction of the SegWit upgrade (which paved the way for Lightning) due to concerns over the reduction in mining fess that would result from transactions moving to Lightning."

However, if the Lightning Network means more people are opening and closing Lightning channels, miners fees could remain consistent.

"Lightning shouldn't generally affect miners' fees, as lightning transactions won't involve miners at all, (except for the opening and closing of a lightning network channel, which will just count as normal transactions on the blockchain). But if the blockchain becomes clogged up again like it did at the end of last year, then lightning may ease that congestion and help keep transaction fees at a reasonable level," said Glen Goodman, bitcoin analyst and author of forthcoming book The Crypto Trader.

"If — and it's a big if — the lightning network delivers what we hope it will, then bitcoin will take a big leap forward in speed, scale and usability," Goodman added. "What worries me is while bitcoin is relatively simple and secure, Lightning has a lot of moving parts. The developers seem very confident, so hopefully they'll iron out the problems and deliver."

This could be only a short term problem though.

"In the short to medium term it will likely reduce miner fees as it will take micro transactions off the main chain," said Charles Hayter founder and CEO of the cryptocurrency data analysis firm Crypto Compare. "However, from a user perspective you will still pay fees for the added security of sending larger transactions on chain. The Lightning Network will allow users to affordably buy cups of coffee again this will allow bitcoin to function better as a medium of exchange, in theory increasing value."

The consensus appears to be: Despite a short term dip in miner fees and transaction costs, the increased adoption the Lightning Network could trigger would more than offset a reduction from smaller off-chain transactions — but at this stage it's hard to know for sure.

Follow me on Twitter