There’s a problem with Bitcoin. A big problem! Transfers are taking longer and longer and costing more. It’s becoming completely impractical for coffee shops to adopt Bitcoin as a payment method because the cost to transfer Bitcoin is more expensive than the coffee it’s buying! Satoshi Nakamoto did not seem to envision a future in which Bitcoin was used for coffee or small purchases, but this is how people want to use it for.
Introducing the Bitcoin lightning network.
The lightning network seeks to seriously clear the clogged network by merging many single purchases into one. Think of it as a type of gift card – a gift card is not cash itself but it can be used like cash. You purchase the gift card once, and with it you can make many small transactions.
The lightning network is a sort of agreement between an entity and a store saying, “We will hold the coins that you earn by selling products until you decide to cash out.”
To use this network you create an agreement that can be cancelled at any time. Let’s say you send $100 worth of Bitcoin to the lightning network that your favorite coffee shops use. When you make a purchase, Bitcoin are subtracted from your lightning balance and added to the coffee shop’s balance. Let’s say you use this card (or app) six times for a total of $35 (however many Bitcoins that would be) and then you decide you don’t want to buy coffee from that shop anymore, so you cancel the agreement. The network sends you back your remaining balance of $65 and sends the coffee shop the coins they earned from you in that time.
Many lightning networks or just one?
It’s hard to predict how many different networks there will be. For example, imagine buying a gift card for Yum! Brands. They own KFC, PizzaHut, TacoBell and a few more. If Yum! Brands decided to set up their own lightning network, then the coins you send it would be spendable at those food places, but they might not be accepted elsewhere. So you would have to anticipate how many coins you will spend at those locations in the next few months.
When you send payment to the network, your coins are subtracted from your balance immediately. However you pay next to zero fees because you are only making 1 transaction (and another transaction made by the network to refund you or pay the stores).
It’s hard to predict if there will be a bunch of different networks or just one main network.
This network is not infallible
It doesn’t fully solve the transaction time/fee problem because it does not force people to use the network. You can still boot up your Bitcoin client and put a bunch of small transactions on the network. You’d pay a lot of fees for doing so, but technically the network could still be clogged.
Let’s say the lightning network reduces transactions by 600%… what happens if 6x more people want to use Bitcoin? Then we’re back where we started.
This is the reason why many people are looking to alternative cryptocurrencies with cheap and instant fees. This is also why many doubt the success of Bitcoin’s future.