Bitcoin users are facing many challenges with the network’s mode of transaction. The first challenge is the high transaction fee. Bitcoin users pay an enormous amount of fee, to make a single transaction. Someone on twitter (name withheld), claimed that he paid a $32 fee to transfer $50 worth of bitcoins to a friend’s address. Users on Kraken and Bitmama cryptocurrency exchange, incur transaction fees when transferring money to an external bitcoin address.
The second challenge is the slow processing time. If you’ve ever made a bitcoin transaction, am sure you noticed that your transaction is still “pending” after few hours. Right now, it takes an average of 20 minutes to confirm a bitcoin transaction. With such a reputation, how will blockchain revolutionize the payment industry?
According to blockchain.com, 13,285 transactions are waiting to be processed. However, only 7 transactions can be processed in one second. Bitcoins transactions are never as slow as the traditional bank wire transfer. However, to replace fiat currency, bitcoin transactions need to be nearly free and instant.
What is the solution?
Currently, the only way to get around the slow processing time is to pay miners an incentive. The incentive is meant to speed up the transaction. Think of the incentive as a bride to speed up your transaction.
Erik Norland, the senior economist at the CME group, has said that bitcoin’s transaction fees could stop it from gaining wide adoption. If blockchain gains wide adoption, the number of transactions will increase, and the network will become slow until it eventually comes to a halt. Imagine paying a $3 transaction fee to order a $10 pizza from an online mall, when you could walk to a nearby mall to buy the same pizza at the same price for free.
The lighting network poses a solution
The Lighting network is a payment channel between two parties. The payment channel enables two users to transact between them without having to wait. The payment channel can be open for days, months or days. The channel can only be closed with the concern of both parties. The payment channel operates like a bank account where two people deposit an equal amount of money in it.
For instance, let’s assume that John and Britney are playing an online game with bitcoins. Rather than making multiple payments over the blockchain network, they can decide to set up a payment channel between them. Each person can decide to fund the account with 20 bitcoins each. If tomorrow, John wants to order a 5 BTC pizza from Cole, and Britney already have a payment channel with Cole. Instead of opening a new payment channel with Cole, John will send 5 BTC to Britney, and Britney will reimburse Cole with 5BTC.
The only major downside to the lighting network is that it is not ideal for large payments. The funds in Britney’s wallet might not be sufficient for John to initiate a significant transfer.