Lightning network strengthens bitcoin while challenging existing financial payments

In a long period of low growth and low interest rates that began with the 2008 financial crisis and continues to this day, banks have been seeking revenue by overcharging existing bank accounts and increasing commissions for their customers' interbank and commercial transactions. However, this policy may be shaken by the rapid development of decentralized banking, where by using blockchain technology, they create a peer-to-peer banking environment, with smart contracts and cryptocurrencies, which seem to provoke the existing way of interbank and commercial transactions.

The Lightning Network is a good example of what could happen in the near future, as it is a decentralized network that uses smart blockchain contract features as it allows direct payments to a participant network where, using Bitcoin trading and smart script language essentially creates a secure network of participants who are able to trade with great intensity and high speed. In fact, it can handle millions to billions of transactions per second across the network, and this capability makes it far superior to traditional payment systems.

The most interesting thing about Lightning Network is that now payments can be made without a depositor while with direct micropayments they can be made with extremely low or zero charges. In essence, the Lightning Network (LN) is an example of an innovation that exploits Bitcoin. It combines the advantage of immediate transfer with clearing at a very low cost. This protocol allows the creation of a peer-to-peer payment channel between two parties, such as between a customer and a merchant. Once created, the channel allows them to send an unlimited number of transactions that are almost instantaneous as well as cheap. It works as its own little book for users who pay low transaction costs for goods and services without affecting the Bitcoin network.

To create a payment channel, the payer must lock a certain amount of Bitcoin into the network. Once Bitcoin is locked, the recipient can invoice the amounts in the currency of their choice. Using a Lightning Network channel, both parties can trade with each other. The two parties can transfer funds to each other indefinitely without informing the main blockchain. Because not all transactions in a blockchain need to be approved by all nodes, this strategy significantly speeds up transaction time. Nodes, Lightning Network with the ability to route transactions are formed by combining individual payment channels between, the interested parties. Lightning Network is therefore the result of many interconnected payment systems.

Eventually, when the two parties decide to complete the transaction, they can close the channel. All the channel information is then consolidated into one transaction, which is sent to the Bitcoin central network for a subscription. Consolidation ensures that dozens of small transactions load the network at the same time, simplifying them into one transaction that requires less time and effort to validate the nodes. It is clarified here that, dollars, euros, or any other currency and Not Bitcoins, are sent through the network. This means anyone who uses it does not care if the price of Bitcoin goes up or down. He does not buy Bitcoin. He does not even need to have heard of its existence.

The obvious advantage of Lightning Network is that it offers faster and cheaper transactions, allowing micropayments in a way that was never possible before. Lightning Network is connected to the Bitcoin blockchain, which exists as a layer on it. The connection means that the Lightning Network continues to benefit from Bitcoin security protocols. On the other hand, an obvious disadvantage is that Lightning Network anonymizes transactions within a payment channel once it is validated. All that can be seen is the transfer of total value, not the individual transactions within it. Anonymous transactions are a major disadvantage for regulators, as they can only see a finalized transaction after the user has closed their payment channel and not the individual transactions within a channel.

Also, one of the biggest problems with Lightning Network is offline trading scams because if one participant in a payment channel chooses to close it while the other party is offline, the former can steal the money. Lightning Network also suffers from errors such as stuck payments, which are outgoing transactions that do not see verification. The biggest problem, however, is that regulators will find it difficult to understand the Lightning Network in order to enact appropriate legislation. Even if regulators understand the protocol with which it operates, it is difficult for them to allow it, because of the anonymity it provides.

However, despite its weaknesses, the Lightning Network is growing dynamically. When more companies start accepting bitcoin in everyday life, the development of the infrastructure provided by the Lightning Network will be crucial for the further penetration of bitcoin. If this happens in the coming years, its users will increase by several tens of millions, thus boosting bitcoin. As a result, regulators need to find ways to regulate this new money supply environment, while financial institutions need to find ways to deal with this new technology, otherwise, they will have to deal with the consequences of this technology as sooner or later New financial technologies may take a part of their transactions and therefore, they may lose a part of their income from the commissions they receive until today.