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Bitcoin’s Lightning Network: what does it mean for Bitcoin?

Bitcoin has a problem. Its size means that transactions are expensive. Some businesses are moving to smaller blockchains for less expensive transactions.

Bitcoin’s solution, the Lightning Network, will make the blockchain scalable by making transactions faster, less expensive and smoothing transactions between cryptocurrencies. To do this, the Lightning Network moves payments off the blockchain. Transactions are instead protected by strong cryptographic guarantees.

The Lightning Network made possible an off-chain transaction swapping bitcoin for Litecoin. This is significant because it was made off-chain, meaning that no transaction was recorded. The potential lies in transactions between chains which allow cryptocurrencies to be exchanged without the wait period of on-chain confirmation. The Lightning Network will allow decentralised transactions to be made instantaneously and between cryptocurrencies by using off-chain smart contracts. When deployed, this will make bitcoin significantly more scalable.

This is all very positive for bitcoin. However, the Lightning Network is not yet live and development of Lightning has been paused, and some businesses are moving to smaller and less expensive blockchains. It is unclear whether Lightning transactions will be possible or if businesses will change behaviour to use it instead of normal bitcoin transactions. Bitcoin users already complain about fees, so the discussion of fees on bitcoin in comparison to Lightning is significant.

Better digital wallet user experience will solve these problems. Digital wallets may be able to tell us which currency or method of payment will be cheapest to help make the decision between Bitcoin blockchain or Lightning.

By Grace Appleford, Research Analyst at Holland FinTech.

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