The Lightning Network scales blockchains by keeping most transactions off-chain. This is possibly a breakthrough in the Bitcoin scaling debate. The network is live and it works. Developers are close to proving that scaling is possible without sacrificing decentralization.
This is accomplished primarily through “payment channels”, wherein two parties commit funds to a channel with an on-chain transaction. They pay each other by updating the balance redeemable by either party in the channel until one party closes the channel and withdraws its balance with a final on-chain transaction. As long as the channel is open, payments can be made at will.
7 TPS are not enough
The transactions between the first and final transaction stay off-chain and hence blockchain throughput is reduced. This is important because the maximum blocksize of 1MB allows the Bitcoin blockchain to facilitate seven transactions per second (7 TPS) at best. If we compare this number to the capacity of centralized payment processors like PayPal (on average 193 TPS; Cybermonday 2015 450 TPS; max. capacity approx. 2.000 TPS) or VISA (on average 1.667 TPS; self-proclaimed max. capacity 56.000 TPS), it becomes obvious that Bitcoin cannot compete with these, relying on on-chain transactions only. Without a dramatic improvement in these metrics, Bitcoin would have no chance to prevail as a means of payment.
UpgradE to fastest transaction network in the world
By keeping most transactions off-chain, the Lightning Network (LN) relieves the blockchain and favors low on-chain transaction fees. At the same time, it now has the capacity to handle several million Bitcoin transactions per second. According to Forbes, it is now the fastest transaction network in the world.
Another advantage is the processing speed of individual payments. Because LN does not scale through higher transaction throughput on the underlying blockchain, but rather through payment channels, payments are handled in a fraction of a second. Payments can be sent almost as fast as data packets on the Internet.
The amount of a payment can be very small in the LN. Even fractions of a cent are possible. The fees for payments in the LN are in the single-digit Satoshi range, making micropayments for the first time economical.
Payment service providers such as PayPal or credit card companies charge a minimum of 0.30 EUR per payment (significantly more for international payments). An article with a price of 0.01 EUR costs the payer at least 0.31 EUR via VISA or Mastercard, which is 30x higher than the article price and would be economically nonsensical.
The fees in the LN depend on the amount of the payment and are usually in the single-digit Satoshi range – completely independent of the location of the recipient. If there is a direct payment channel between the sender and the recipient, then the transaction fees can even be completely eliminated.
How well micropayments work in the LN, you can test HERE.