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.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money. The Article/Information available on this website is for informational purposes only, you should not construe any such information or other material as investment advice or any other research recommendation. Nothing contained on this Article/ Information in this website constitutes a solicitation, recommendation, endorsement, or offer by LegacyFX and A.N. ALLNEW INVESTMENTS LIMITED in Cyprus or any affiliate Company, XE PRIME VENTURES LTD in Cayman Islands, AN All New Investments BY LLC in Belarus and AN All New Investments (VA) Ltd in Vanuatu to buy or sell any securities or other financial instruments in this or in in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction. LegacyFX and A.N. ALLNEW INVESTMENTS LIMITED in Cyprus or any affiliate Company, XE PRIME VENTURES LTD in Cayman Islands, AN All New Investments BY LLC in Belarus and AN All New Investments (VA) Ltd in Vanuatu are not liable for any possible claim for damages arising from any decision you make based on information or other Content made available to you through the website, but investors themselves assume the sole responsibility of evaluating the merits and risks associated with the use of any information or other Article/ Information on the website before making any decisions based on such information or other Article.

Cryptos feed

Latest Crypto News

Latest Crypto News & Analysis

Editors’ Picks

Shiba Inu price presents buy signal, anticipates 30% breakout

Shiba Inu price is undergoing a minor retracement after it saw a sudden uptick in buying pressure, leading to a rally. This correction will provide sidelined buyers with an opportunity to jump on before the next leg higher.

More Shiba Inu News

Axie Infinity user converts Magic Internet Money to earn over $82,000 a year

A player of play-to-earn game Axie Infinity, has confirmed that the game offers higher rewards than a Goldman Sachs’ research associate’s salary. Analysts have a bullish outlook on the gaming token’s price.

More Axie Infinity News

Altcoins recover as BTC chops

Bitcoin price is consolidating while it tries to move higher, but Ethereum price seems to be enjoying a full-fledged rally as it comes closer to setting up new highs. Ripple price, on the other hand, is struggling to find bullish momentum.

More Cryptocurrencies News

Chainlink price ready to reverse, 30% upswing likely for LINK

Chainlink price seems ready for a reversal of its two-week downswing as it attempts to create a higher high. This outlook is also supported by on-chain metrics, which suggest the possibility of accumulation at the current levels for LINK.

More Chainlink News

Cyber Monday 2021 Discounts!

Glued to your trading screen on Cyber Monday? Upgrade your skills by signing up for FXStreet’s Premium service, offered at a discount of up to 50%. Fellow traders have already taken advantage of Black Friday profits. What about you? 

Subscribe now!