Lightning Network – Bitcoin`s killer Application? 

By enabling the transaction to occur through payment channels rather than on-chain, the lightning network offers a potential way for bitcoin to address its scalability problem. People have likened this to what fiat currency did for gold, arguing that the lightning network could be bitcoin’s ‘killer application’. 

The analogy works when you think about it, the use of paper notes was a way of scaling gold, just like the lightning network is a way of scaling bitcoin. The scaling of printed money eventually ‘killed’ gold as a currency and turned it into a value store. It remains to be seen if the lightning network can do this for Bitcoin. 

What then, are the potential drawbacks of the lightning network and how do other attempts to scale blockchains differ? 

Lightning is still handling only a tiny fraction of on-chain transactions. Nodes are growing along with the number of wallets that support Lightning, but there is a long way to go to simplify the User Experience of creating/managing channels and invoices.

Another, perhaps more significant, problem, is the risk of powerful hubs developing on the network. 

Hubs are big pools of capital that could facilitate a large proportion of the transactions in the network. This would risk the network’s security, and of course, risk re-introducing centralisation to the system. 

The other main prominent attempt to scale blockchain technology is occurring on Ethereum. These upgrades are known as ETH 2.0 and include changes to consensus mechanism and a technology known as sharding. These are covered in more detail in our knowledge base article on Ethereum. 

The Lightning Network is a work in progress but should it be successful, may finally provide the solution to Bitcoin’s trilemma, enabling it to scale transactions without compromising its core features. At that point it becomes more than a Store of Value, and can compete with fiat currencies as an effective Medium of Exchange as is now happening in El Salvador, where Bitcoin is now legal tender, and the Lighting Network is the means to on-board locals.