Lightning Network: Bitfinex Takes a Leap of Faith

Lightning Network: Bitfinex Takes a Leap of Faith

This month Bitfinex – one of the best-known and largest cryptocurrency exchanges – announced that they have activated a Lightning Network node. Bitfinex is the first large crypto exchange to take this step. The integration of the Lightning Network offers many potential benefits to Bitfinex users. But what are these benefits and what to expect from this new development going forward?

Bitcoin congestion and inefficiency

Bitcoin transactions can take only 10 minutes, but they can also take hours and in some cases even a whole day. This is because the Bitcoin blockchain can only process a limited number of transactions per second and because transaction execution requires a lot of computing power, electricity, and causes congestion on the already limited on-chain network. One way for Bitcoin to become an efficient exchange of value protocol was by adding a new ‘highway network’ in January 2018 to improve the scalability of Bitcoin transactions. This extra layer on top of the traditional Bitcoin blockchain is called the Lightning Network.

Lightning as a solution to scalability and efficient micro payments

Known as a second layer solution for solving scalability problems, the Lightning Network is different from SegWit. SegWit makes more transactions possible in a block by more efficient separation of transaction information, but this happens on the traditional chain. Lightning is also different from the adjustment of block sizes, which tries to solve issues on the traditional chain as well. Bitcoin Cash is a good example of the adjustment: it is a hard fork of the original Bitcoin with the aim to solve scalability issues by simply using bigger blocks. Well, Lightning is different.

It does not actually use the traditional blockchain. No confirmations are required to process a transaction. The receiver simply opens a dedicated channel with a certain capacity (amount of bitcoin) at the time of need. The sender sends the matching amount to the receiver and the channel closes afterwards. Only then the transaction will be added to the blockchain. Provided you leave the lightning channel open between the users, you can endlessly exchange bitcoin without creating congestion on the traditional chain, until the channel is closed.

Crypto exchanges, however, use the traditional limited chain. The increasing volume of transactions causes congestion, since they all try to use the same “highway,” where only 7 transactions per second can be executed simultaneously. Depending on how busy it is on the chain, a transaction can sometimes take 10 minutes, but sometimes also days. Trading is often synonymous with speed, with delays making it difficult for exchange users to rapidly act on arbitrage opportunities. Lower costs of the deposits and withdrawals also make it more attractive to seize these opportunities.

According to Paolo Ardoini, CTO of Bitfinex, the lighting network on Bitfinex works like a charm. Bitfinex has seen 800 transactions during the first week of operation, of which 600 transactions were about 7 bitcoin of deposits to Bitfinex. While this is relatively small compared to the 50+ million USD traded per day on Bitfinex, it seems like a good start to kick off the first week of lightning on the exchange. At this moment, the Bitfinex lightning node has 174 channels open with around 9 bitcoin inbound capacity and 8 bitcoin outbound capacity, steadily growing capacity since its launch.

Unfortunately, the use of Lightning also has disadvantages compared to on-chain usage. The recipient and the sender must both be online at the time of their transaction and have to monitor if their transactions go through. In addition, Lightning will not work for larger transactions, as long as multi-part payments are not enabled, which limits its value to some users. Another issue is that setting up payment channels can be cumbersome and requires technical skills that some users may simply not have.

The new update allows for larger transactions

But what else will Lightning add to the crypto ecosystem in the years to come? What is certain is that the number of on-chain transactions is falling, while the number of lightning transactions is growing. Partly for this reason, Blockstream – a well-known Canadian blockchain solution provider – has issued an update of the c-lightning software (v0.8.0) this month. This makes so called “multi-part payments” possible on the network. One of the changes made by the update is to make it possible to send larger payments through the Lightning Network. The size of payments is no longer dependent on the limitations of a payment channel through split payments (‘’splice-in/splice-out’’). When the capacity of channels is low, the payments can be made in parts through multiple connected channels. In addition, the latest update simplified the integration of Lightning into applications, making it more interesting to use this technology for companies dealing with crypto transactions.

How can the lightning network be of service?

Cryptocurrency exchanges are where the majority of crypto transactions take place and so they benefit the most from making these transactions as efficient and user-friendly as possible. It is not surprising then that the lightning network will be implemented successfully across exchanges first. In addition to Bitfinex, there are several much smaller exchanges and p2p crypto networks that have been using lightning for a while. The hope is that other large exchanges will monitor Bitfinex’ success with lightning and if all goes well, follow in its footsteps. 

In addition to exchanges, organizations and individuals, who can benefit from fast and cheap transactions without the need to make every transaction visible on the blockchain, are expressing interest in the Lightning Network. After all, many businesses in a variety of industries have to deal with large numbers of small transactions. Obvious examples include online gaming currencies and monetizing content on the internet.

It is exciting to see what Lightning and the new update will bring us in the future. Will it prove to be that welcome new step to mainstreaming Bitcoin use? 

Contributed by @LordCatoshi

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