Can you use Bitcoin to make small payments online? Yes, of course.

Is it convenient? It depends.

The Bitcoin Blockchain hasn’t been very fast. Transactions can take several minutes to hours. As Bitcoin adoption grew, speed and scalability issues began to show up. Its growing popularity resulted in network congestion, Bitcoin transactions slowed down and fees shot up. Bitcoin users grew frustrated as they had to pay high fees for small transactions. The scalability issue is obvious if one thinks that the Bitcoin Blockchain can process only 7 transactions per second (TPS). As comparison, Visa can process up to 22,000 TPS.

The Lightning Network (LN) came about to address Bitcoin’s bottlenecks. The Lightning Network is an extra layer on top of Bitcoin. It is designed to solve Bitcoin’s speed, scalability and cost issues. You can think of the LN as a layer-2 network that operates on top of the Bitcoin network in order to avoid overburdening the main Blockchain. The LN can process more than 1M TPS.

How It Works

Suppose you ordered drinks at a bar for yourself and your friend. Instead of paying for each drink, you keep a running total and settle-up at the end.  The Lightning Network follows the same approach. It is as simple as paying for the tab at the end of the night. Bitcoin transactions only take place when you set up or close a tab, technically called a “channel”.  The Lightning Network ensures instant payments, and you don’t have to worry about block confirmation times. It ensures complete off-chain transaction security thanks to blockchain enforced smart contracts.

Lightning Nodes

Lightning Nodes are the fundamental access-points of the Lightning Network. Lightning nodes are responsible for processing Bitcoin transactions without storing them on the main Bitcoin Blockchain (until the channel is closed). Users can contribute to the Lightning Network’s expansion by establishing their own Lightning nodes. However, the process to set up a new Node can be quite complex. Most LN users do not set up their own Nodes, they just use Lightning Wallets. Node owners lend their nodes to other network users for off-chain transactions and charge fees for routing transactions.

Lightning Wallets

Lightning Wallets are an instant solution for sending/receiving bitcoins without owning a Lightning node. There is a plethora of Lightning Wallet apps to choose from.

Depending on your needs and technical expertise, the Lightning Network offers both custodian and non-custodian wallets.

• Custodian Lightning Wallets like Wallet of Satoshiand Bitcoin Beachare custodial services that assume all the technical complexities to operate a Lightning Node. They manage payment channels and Bitcoin keys for the users. However, they have access to off-chain transactions, so users have less control of their privacy.
• Non-Custodian Lightning Wallets offer a higher degree of independence to the users. Lightning Wallets like Breezand Phoenixenable users to access their own channels with complete control over bitcoin transactions. The responsibility of securing Bitcoin keys and managing payment channels lies with the users.

How the Lightning Network Came About

Developers Thaddeus Dryja and Joseph Poon came up with the LN concept in 2015. The idea was simple: What if the maximum number of transactions takes place off-chain? What if the blockchain records the aggregate balance of all the micropayments as one? Based on these questions, they suggested the idea of payment channels.  Following this concept, they published a white paper in 2016.  The LN idea quickly attracted developer communities. Their active participation resulted in the launch of the LN in 2018. According to the River Research Report published in October 2023 routed lightning transactions have increased by 1,212% in just two years with the LN now processing in excess of 6 million monthly transactions which is about half of Bitcoin’s daily transactions. According to 1ml.com today the LN has 13k+ Nodes and 50k channels.