As Bitcoin’s Lightning Network usage has shot up even through the bear market – and it’s worth reminding ourselves of the near miracle it is: moving BTC across the world in seconds. – it’s still worth zooming in on the vulnerabilities.
There are still wrinkles to be ironed out. Usability and liquidity are two vulnerabilities of Bitcoin’s Lightning Network.
Before diving into the vulnerabilities and the potential solutions, let’s quickly recap what Lightning is.
Short Background on Lightning
The Lightning Network is a Layer 2 network that operates on a channel-based system. Two parties deposit funds to pay each other. This process saves them from having to wait for block confirmations before they can finalize transactions for goods or services. Even though it is not literally lightning-fast, settlement happens in a few seconds. It’s also cheap: think a penny.
Wait, isn’t the use case of opening a channel with one user very limited? Well, the person with whom you opened the channel has probably already other open channels. This means you’re only a handful of channels away from any person on earth that uses Lightning. Your payment flashes through a series of channels before it reaches its destination.
In short, the Lightning Network significantly improves Bitcoin’s scalability and transaction speed.
Some Lightning Usage Data
According to a report by Lightning company River, growth has been 1200% in two years, between August 2021 and August 2023.
Some other data points from the report:
- In August 2023 the average transaction volume was 2.5 transactions per second. Some of the fastest-growing sectors that use Lightning: social tipping (think Nostr), streaming and gaming.
- The average Lightning transaction size was around 44.7k satoshis, or $11.84.
- In August 2023, an estimated $78 million was publicly routed. This is a 546% increase since August 2021 and translates to 900 million dollars in yearly volume.
- River’s Lightning payment success rate was 99.7% in August 2023 across 308k transactions.
- Around 180 companies are Bitcoin Lightning companies (see picture)
Vulnerability #1: Usability
Even though usability is not a vulnerability in the technical sense, I still mention it here. Bad usability might slow down adoption and hence interest from developers to keep improving the protocol.
A newbie that wants to use Lightning while keeping their own BTC keys, must install software to run their own Lightning node. They must ‘manually’ open a channel with a user to kick off their first transaction. While nowadays this software that allows you to do this (Umbrel, for example) is user-friendly, it’s still not something that the masses will do. Even for companies, it is probably a stretch to run their own nodes.
A much more popular alternative for the average Lightning-curious user is to download a Bitcoin/Lightning wallet app. Wallet of Satoshi, for example, is a mobile app for iOS and Android. BUT. It is a custodial wallet, which means that the app provider holds your funds on your behalf and handles all the technical aspects of the Lightning Network for you. Convenient, but not your keys…
Vulnerability #2: Failed Transactions
The issue that is in part responsible for failed transactions – and failed…
Erik started as a freelance writer around the time Satoshi was brewing on the whitepaper.
As a crypto investor, he is class of 2020. More of a holder than a trader, but never shy to experiment with new protocols.
