Authors: Martin Betz, Dr. Jonas Gross, Jonathan Knoll, Yannic Fraebel, Denis Scheller, Prof. Dr. Philipp Sandner, Daniel Wingen
Executive Summary
The Lightning Network is the next evolutionary step of Bitcoin. With the Lightning Network as the rails and Bitcoin as the vehicle, there is tremendous disruptive potential in how payments are conducted for countless industries, and far-reaching implications for companies, non-profits, merchants, and consumers alike.
Bitcoin enables global transactions without intermediaries. However, settling all payments via the Bitcoin Blockchain has limitations. The Lightning Network can significantly increase payment throughput, which is necessary for the mainstream adoption of Bitcoin as a payment system.
The adoption of Lightning will continue to increase in the coming years as soon as a broader audience becomes aware of the added value and beneficial applications. Also the possibility to send other assets, such as stablecoins, via the Lightning Network, might positively impact its development. Similar to the evolution of the Internet, Lightning’s technical complexity will soon be abstracted away which will reduce barriers to entry by providing a more intuitive user experience.
Although Lightning has great potential, we also need to acknowledge that a lot of work needs to be done as the technology matures (see Figure 1). As Lightning moves from research and development to more commercial applications, it is clear that various aspects like usability need to be improved to ensure that non-technical users can take advantage of the Lightning Network. People and businesses, alike, should be able to run nodes that send and receive invoices without needing an extensive technical background or knowledge. Similarly, legal, compliance, and operational issues must be addressed globally before Lightning’s network effects are fully realized.
The Lightning Network has made major improvements in transaction resilience over the past few years. However, proper liquidity management to enable seamless routing, especially for large payments, needs further progress. Moreover, on- and off-ramp costs and volatility issues need to be addressed, which currently can negate near-zero costs and instant settlement benefits of the Lightning Network itself.
Luckily, many people and companies (e.g., Strike, Lightspark, Lightning Labs, Opennode, Bitcoin Suisse, and Galoy, to name a few) are working to address these challenges. In time, many of these challenges will be solved, similar to the development of other technologies that were introduced in the past. For example, VOIP was virtually unusable when it first came out in the mid-90s, given bandwidth constraints. Yet today, half the planet unconsciously uses it to communicate.
Addressing those challenges will make the Bitcoin Lightning Network’s inherent advantages shine even brighter:
an independent network (unfreezable, censorship-resistant),
a cash-like bearer instrument with near-instant finality with no chargebacks or reversals,
near-zero costs for even micropayments,
a globally recognized and inclusive currency that is the same everywhere, and
Lightning's potential interoperability to be used with other assets or blockchains
Ultimately, the Lightning Network has the potential to live up to its promise of becoming a global value transfer settlement network that acts as an open protocol for money. The open source movement showed us over the past several decades the innovative power that can be released with that approach.
This report highlights the first sprouts of those innovations and the art of the possible, covering the motivation, functionality, and use cases, as well as the future of Lightning.