Bitcoin has revolutionized the way payments can be made in the 21^st century.  There’s no centralized bank holding money or validating transactions – instead, everything is handled by the network in a decentralized manner.  No one’s in charge, so no one can tell you how to handle or spend your money (i.e., there’s no censorship).  In addition, you can maintain a higher level (though not perfect) of anonymity when using new addresses with each transaction.  Transactions are also irreversible, so you don’t have to worry that someone might pay you and then steal their bitcoin back from you.  Bitcoin is safe, stable, and a worthwhile cryptocurrency to use in sending money to other parties for goods and services. 

But it can be soooo slow.  And transactions can be pretty expensive.

Bitcoin Transaction Speed

Why?  Even though a new block in the Bitcoin blockchain will be produced every 10 minutes or so, your transaction may or may not be included in the most recent block.  Or the next one.  Or even the next one.  In fact, it is not unreasonable to think that a single transaction could take up to a day or two to be completed. 

When you initiate a transaction on the Bitcoin network, it doesn’t immediately go into the next block; instead it heads into a “holding bin” of sorts – the Bitcoin mempool.  Miners choose transactions from this pool to confirm, and once every 10 minutes or so a new block of transactions is added to the blockchain.  When a block is added, the miner gets not only the mining block reward (currently 12.5 BTC) but also the fees associated with each transaction in the block. 

From the miners’ perspective, their incentive to earn more money means that they will tend to pull higher-value transactions first and leave lower-value transactions in the mempool.  This means you have two basic options:  1) initiate a transaction with a higher fee, or 2) be patient and wait for the transaction to be completed.  (There are other ways to “push” the transaction along, but none of them are guaranteed or even necessarily helpful.)

Transaction Fees

As of the writing of this post, each transaction is averaging about $0.50 USD, but at various times in the history of Bitcoin, fees have been as high as ~$40 average per transaction.  If I owed my friend $10 for pizza, I would end up paying $50 for $10 worth of pizza – definitely not worth it.  And it could possibly take a day or two to reach his Bitcoin wallet!  Is there a way to pay more quickly and with lower fees?

I’m glad you asked!  Yes, there is!  Enter the Bitcoin Lightning Network (LN). 

Bitcoin Lightning Network Overview

The LN is capable of completing transactions within seconds and with minimal fees (it’s difficult to give an exact amount – we’ll discuss this later).  Rather than completing a transaction that might wallow in the mempool for quite some time, the LN allows one sender to direct payments to a receiver (and vice versa) with no wait time.  The LN creates a new “layer” on top of the current Bitcoin network that will essentially bypass the wait time that a standard transaction must endure.

So how exactly does this work?  Rather than creating a new transaction every time bitcoin passes between two parties (and broadcasting this transaction to the network), these parties are able to establish a shared (or “multi-signature”) wallet and deposit a small, individual allocation to the wallet.  A single entry on the blockchain is added and used basically as a bookmark for subsequent transactions between these two parties.  Subsequently, the individual balances are passed back and forth as desired by both parties.  Only the most recent version of the blockchain entry is considered valid.  When they are ready to “terminate” their relationship, either party is able to close the blockchain entry and broadcast it to the network. 

BTC LN Fees

Let’s discuss how fees work in the LN.  If you and a friend establish a shared wallet, you can transfer money to each other for only cents per transaction.  Yes, you heard me right, almost no fees at all.  But let’s say that you want to pay someone else that you don’t have a direct relationship with – would you need to establish a direct relationship with them and exchange bitcoin?  No, you can operate through other known relationships.  Confused?  Let’s take a look at the figure below.

Alice owes Kevin money for lunch, but they haven’t established a shared wallet – can she still pay him, or do they need a new wallet?  Well, luckily Alice and Stephen have a shared wallet, as do Stephen/Jen and Jen/Kevin.  Alice can pay Kevin directly (the thick black line in the figure) by paying through a chain of shared wallets (the think blue lines). 

            Albeit this specific situation is just an example but think about how this could be used.  What if, for instance, Jen was replaced with a payment processor who handles payments for $0.10 per transaction?  You could potentially pay any third party through shared relationships with the payment processor and drastically reduce the associated fees and time it takes to complete the transaction.

Learn About Lightning Network

            Are you ready to get started??  Well, while it is possible, it’s definitely not prolific yet.  The LN is still a relatively new occurrence in the cryptocurrency world, but it is gaining popularity and becoming more popular to use as an alternative to the way standard transactions are performed.

            Curious about the LN?  Take a look at some of these articles:

• Here is one company who supports the LN currently.  This isn’t an endorsement; rather it’s an example of where you can get started with the LN if you are interested.
• Still confused about the Bitcoin mempool?  Learn a little more here and here.
• Here’s an excellent resource to learn more about the LN.
• Read more about the original development of the LN.

Thanks so much for reading!  Go take a look at the LN and see if it’s a good resource for you!

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