For the past several years, the Bitcoin block size has been the biggest controversy in the space. The debate surrounding the issue started around 2013, and in 2015, the Lightning Network was announced as a possible solution.
Despite four years of development on a 6-month project, Lightning employees still havenât answered the question the Lightning Network was designed to address: how will it scale and remain decentralized?
In this article, we discuss five reasons the Lightning Network canât scale and remain decentralized.
1. The Lightning Network is too expensive
One of the proposed benefits of the Lightning Network is low fees. Itâs not really the case. Lightning transaction fees are low, but only relative to Bitcoinâs. It still requires an on-chain transaction to open one Lightning channel, which is not supposed to be enough to route payments anywhere else in the network. The optimal number of channels per user is around 14.
Bitcoin fees have been hovering around $0.10 for some time now, but even this amount is enough to price out third world users. Venezuelans making a dollar a day canât afford to open 14 channels just to get paid, let alone the $50, $100, or $1,000 transaction Bitcoin maximalists want to see on-chain.
That the Lightning Network canât cater to Venezuelans, Zimbabweans, and other marginalized 3rd world users severely limits its target audience. These are the people who need Bitcoin the most, and adoption must begin with the people who need it.
2. Lightning has terrible UX
One of the components to using the Lightning Network as envisioned by the developers is running a Lightning node. Lightning nodes require connection to a Bitcoin node, and additional hardware to make sure they never go offline. Downtime for a Lightning node can mean complete loss of funds.
Despite Lightning advocatesâ insistence that the technology is still in its early years, a technology as clunky as this isnât even being adopted by tech enthusiasts, let alone the average person in the US, or Venezuela.
3. Lightning has a low ROI
On the demand side, Lighting prices out users by keeping fees high. On the supply side, Lightning is equally impractical. Besides the requirement for nodes to be live 100% of the time lest users lose all their funds, the Lightning Network is impractical for liquidity providers.
Insufficient returns are the greatest antagonist to meaningful investment in the Lightning Network. This may change in the future, but at the cost of decentralization, as a high ROI would attract competitors and eventually spawn large hubs as are already being formed.
4. Lightning’s Network Latency and the Routing Problem
The aforementioned problems are mostly economic obstacles facing the Lightning Network. There are equally damning technical hurdles LN faces.
Network latency refers to the time it takes to send messages across the network. In Bitcoin, this is done through block propagation, with game theoretical incentives to ensure the entire network can quickly come to consensus.
In the Lightning Network, nodes must find a path to send payments before sending. The problem is, every time a payment is sent, the balances of each channel must be updated. Nodes have to always remain aware of the channel balances, learning about updates almost instantaneously. Lightning payments have a high frequency of failure now, and this problem will be even worse at scale (without centralized hubs) due to the volume of payments.
To ensure successful payments, users are incentivized to open channels with nodes which have lots of BTC available to route. This leads to a âhub and spokesâ (centralized) network topology.
5. The Lightning Network is easy to censor
Because the Lightning Network naturally tends toward a hub-and-spokes model, itâs very easily disrupted. If a node with large balances were taken down, it would disrupt the network immensely.
Furthermore, if the identities of Lightning Network nodes operators are known they can be easily censored through the same KYC restrictions which are placed on exchanges today.
In Bitcoin, this censorship is impossible because of the incentives of the system, but Lightning has no such incentives to prevent centralization.
Closing Thoughts
Because of its high costs and highly technical UX, Lightning appeals to a small subset of people – skilled developers in first-world countries who already hold BTC.
Without custodians to take on these issues, further adoption is inhibited. With custodians, the Lightning Network becomes a recreation of the existing banking system, entirely defeating the purpose of Bitcoin. This means that the Lightning Network canât scale and remain decentralized.
Thankfully, there are alternative approaches to scaling that may remain decentralized. Bitcoin Cash and Bitcoin SV have interesting approaches to this problem.
We write about these and other cryptocurrencies, analyzing them using their fundamentals and incorporating the technical viability of their solutions into our projections of their future value.
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