In this developing world of digital currencies, we seem to have two teams emerging in the area of payment processing. Team 1 is Bitcoin Lightning Network: decentralized, trustless and scalable, benefitting from layer-two technology and is much more cost efficient for the users. Team 2 is Bank Payment Network, of which VISA® is the largest. This method is centralized and requires total trust in the banks that power the transactions with significantly higher fees and is not operationally as effective.
A Quick Reminder of the Lightning Network
The Lightning Network is a decentralized protocol built separately from the Bitcoin blockchain, that can be layered on the blockchain. It features a peer-to-peer system for making Bitcoin micropayments without them being broadcast to the blockchain. It enables fast, bi-directional transactions between participating users without the need for a custodian, and it’s being seen by many as the solution to Bitcoin’s scalability problem.
1) Layering vs Networking: the relative benefits
Bitcoin is a first-layer network, meaning it manages multiple digital events on its blockchain. And Lightning Network is one of those digital layers, i.e. a second-layer protocol that interacts with the Bitcoin blockchain to improve its performance (in this case, in terms of speed and affordability).
2) To authorize or not to authorize
Bitcoin is a permissionless network, meaning simply that payments don’t require authorization. Instead, full nodes confirm the validity of payments. Lightning doesn’t require authorizations for its off-chain micropayments or its broadcasts to the Bitcoin blockchain either. Conversely, payments on the VISA network not only require authorization, they require dualauthorization. The first passes the authorization request through the various banks, and the second is to get central bank authorization. VISA authorization is a clearly linear process.
3) Bitcoin, Lightning and VISA on transaction speeds
If we run a transaction speed contest between Bitcoin and VISA, Bitcoin comes out of it very badly. While VISA can handle around 1700 transactions per second (TPS), Bitcoin can only handle seven (!). Bring in the Lightning Network, however, and Visa’s TPS get blown out of the water. Lightning is capable of running millions to billions of transactions per second. There’s no current exact estimate of transaction speed yet, but once the cumbersome blockchain processes that Bitcoin currently runs are removed, Lightning’s decentralized structure will process payments exponentially faster than VISA.
4) Lightning’s decentralization vs. VISA’s network effect
In terms of the relative size, VISA has a user base of just over 1.14 billion people worldwide, and Lightning (using the number of unique channels as a benchmark) has a mere 59,745 (August 2021). The sheer number of people who use VISA makes VISA the gold standard. But how did it get there? Back in the day, the growing number of users prompted VISA to develop its network so it could run 1700 TPS. The more widely it was adopted, the faster it attracted new users. This self-fulfilling prophecy is called the network effect.
Lightning channels form a large mesh of mini-networks where users can transact with each other. The users’ own machines provide a decentralized infrastructure, which means that Lightning doesn’t need the large-scale payment infrastructure that VISA has. This is the essence of Lightning’s decentralization. And it’s a superb solution to Bitcoin’s current delays. So, the choice for users between two fast networks is, A) a network that uses its size and infrastructure to process transactions quickly, or B) a set of small networks that are lightning (ahem) fast without requiring either the finality of Bitcoin for transaction completion or VISA-level infrastructure.
5) The Significance of Micropayments
One of Lightning’s breakthroughs is that it enables users to make micropayments without waiting for confirmation on the Bitcoin blockchain. The minimum micropayment for Lightning is also the smallest possible Bitcoin value: 1 satoshi, which amounts to $0.000489 (as of August 2021).
And what’s the equivalent on VISA? Pre-authorization comes the closest. First, the cardholder’s credit limit sets the maximum a user can spend. But one can also start a tab at a bar (for example) and set a limit that enables partially authorized payments, which will get fully authorized once the tab is closed. As for the minimum amount? In theory, a pre-auth can be set as low as one US cent. So while there’s no such thing as a VISA micropayment, it could be defined as one cent to $20.
To sum up the old Visa way and what we see as the future of payment systems:
LQwD is playing its part in Lightning’s development as a game changer in the world of global payments. LQwD operates the nodes that enable all the speed, layering, decentralization and settlement outlined in this article, that will help the network become the next generation of the world’s payment system