Having obtained a diploma in Intercultural Communication, Julia continued her studies taking a Master’s degree in Economics and Management. Becoming captured by innovative technologies, Julia turned passionate about exploring emerging techs believing in their ability to transform all spheres of our life.
By bringing Lightning Network’s speed and costs to payment channels on blockchain protocols, Metaverse will help merchants to accept transactions in digital currencies.
Blockchain networks have been plagued by slow transaction speeds and limited block times since their inception. Although many projects have tried to increase the transactional capacity of blockchain networks, there have been few functioning solutions that do not compromise on security or decentralization as a result. Solving the issue of scalability is essential if blockchain-based payment networks are to compete with traditional payment processors, such as the Visa network, which can process up to 65,000 transaction messages per second.
Lightning Networks, first proposed and introduced as part of the Bitcoin protocol in 2016, provide a functional second-layer payment protocol that can be deployed on top of an existing blockchain. Since their deployment, they’ve become one of the most promising scalability solutions in the blockchain space to date. So named both for their speed and the way in which transactions move through the network, Lightning Networks could represent the future of merchant payment channels on the blockchain, and help expedite adoption. Here, we explore the history of Lighting Networks and their suitability in facilitating blockchain merchant payments.
Lightning Network History
The concept of a ‘Lightning Network’ was first proposed by Joseph Poon and Thaddeus Dryja for the Bitcoin protocol. In their original whitepaper, the researchers outlined how, if the Bitcoin network in 2016 was to match Visa’s processing capacity, it would have to validate blocks 8 gigabytes in size every 10 minutes; resulting in an enormous and impractical 400 terabytes of data stored on the network each year.
Instead, Poon and Dryja proposed a network of micropayment channels to solve scalability: the Lightning Network. These micropayment channels would not require ‘trust’ in the same fashion that large transactions on a blockchain network would, as they are only opened between two transacting parties. By using a large network of micropayment channels, a blockchain could in theory scale to handle thousands of transactions every second, provided network participants maintain these open channels.
In the original research paper proposing the Lighting Network, Poon and Dryja commented that Lightning Networks would eventually resemble a correspondent banking network, which acts as an intermediary for banks to process payments through.
How Are Transactions Processed on the Lightning Network?
To begin transacting via the Lightning Network participants must first establish their own Lightning Channel. Take for instance Alice and Bob. Every week, Alice needs to send Bob funds from her Bitcoin balance. To do this, both Alice and Bob deposit BTC into a multi-signature wallet, which controls fund pay-outs.
In this situation, if Bob is only ever going to receive Bitcoin and not ever send any to Alice, he can simply denote his BTC balance in the multi-signature wallet as zero. Every time Alice sends BTC to Bob, it will be deducted from her BTC balance in the wallet, and likewise, Bob’s balance will be updated to reflect what he has received.
Each party signs the contract to say that the balance has been updated, and this can be repeated backward and forward multiple times, without each transaction being validated on the main Bitcoin blockchain. This significantly reduces the load, and subsequently the fees, on the main blockchain. Once the payment channel is closed by either party, every transaction which has taken place is validated by miners on the main blockchain, in the same fashion as all other transactions are processed.
It’s much easier to visualize in this hypothetical situation, as we take it for granted that Alice and Bob know each other and that they’ve both agreed and have the expertise to set up a Lighting Network channel and multi-signature wallet between themselves. However, setting up a Lightning Network payment channel between say a restaurant owner and a regular customer in a real-life scenario is inherently more complex.
Limitations of the Lighting Network and Possible Solutions
As we’ve established, at present participants transacting over a lighting network need to use a pre-established payment channel to facilitate payment routing. This means that both parties have to go out of their way to create these channels prior to using a Lightning Network, for example by setting up a Lightning node.
This is a reasonable task for those parties who wish to transact regularly with each other, but for individual one-time payments between a merchant and a customer, this severely limits the usefulness of Lightning Network and has been a major limitation to its adoption.
But blockchain researchers are already working to solve this. For example, instead of establishing a single payment channel for two parties to transact, the Dualchain Network Architecture deployed by Metaverse allows for transactions through the pre-built channels connecting 23 Super Nodes and 529 Regular Nodes on the network. Instead of establishing dedicated Lightning Network payment channels, transacting parties on the Metaverse blockchain can enjoy extremely fast transactions with low fees through a multi-level super node structure, as long as each party has an open channel to any of the participating nodes.
What Would a More Practical Lightning Network Mean for Merchants?
At present, accessing and establishing payment channels on the Lightning Network is reserved for relatively tech-savvy merchants, and as a result, the number of online stores leveraging this fast blockchain payment system is limited. If online merchants can accept Lightning Network payments or payments as cheap and fast as the Lightning network allows without having to establish nodes or dedicated single payment channels, this may revolutionize the way payments are made on the blockchain.
By bringing Lightning Network’s speed and similar transaction costs to payment channels on multiple blockchain protocols, as Metaverse has achieved, it would be far easier for merchants to open their doors to customers who wish to transact in digital currencies. Likewise, this would bring blockchain-based payment networks one step closer to achieving the ease and speed with which payment incumbents like Visa are able to handle transaction capacity. As a result, a payment network of this type is likely to vastly increase the number of users choosing to pay in digital currencies and solve one of the longest-standing issues in the blockchain industry.