The much awaited Lightning network was released on Thursday by Lightning Labs in beta version for the Bitcoin network. Even though it is beta, it includes all the features that is billed to increase transaction speed and reduce fees for the network. This means actual users can immediately begin to use it today. And wallets and payment processors can begin to fit their applications to utilize it. Given the scaling drawbacks that holds the network back from being able to sustain the billions of people that could potentially be using it, this release could be a game changer. Note that this is one of a few implementations, one other being the implementation by Blockstream which is currently still in alpha stages. (Ethereum has similar ongoing development in Raiden.)
Bitcoin Fundamental Metrices Still in a Slump
Prior to this release bitcoin values have been falling. From a high in late December 2017, its value today has fallen to between 60-70% lower. However, even more important is that the fundamental metrices that have marked its growth over its first eight years have now started to trend slightly lower.
In prior articles about a month ago, I pointed readers to watch the daily unique address as one of the strongest fundamental metrices that would tell when the network would be back to its prior growth rates and likely recovery of sustained growth in value. At the time, chart readers were divining rising wedges and inverse head and shoulder patterns, and pointing to a recovery to over $12,000 when fundamentally that was pretty much unsustainable based on the user growth underlying the network.
The article then is here:
“There is Little Chance Bitcoins can Sustain any Real Recovery Until This Fundamental Metric Begins to Turn Upwards Again”
https://steemit.com/bitcoins/@kenraphael/there-is-little-chance-bitcoins-can-sustain-any-real-recovery-until-this-fundamental-metric-begins-to-turn-upwards-again
And a review of the fundamental metrices that drive bitcoin values was presented here:
“A Review of a Few Fundamental Metrices that Drive Bitcoin Value and What They Currently Indicate”
https://steemit.com/bitcoin/@kenraphael/a-review-of-a-few-fundamental-metrices-that-drive-bitcoin-value-and-what-they-currently-indicate
A network effect-based analysis currently places values closer to $5,000 (this should not be taken as a prognostication of a price fall to that level) and the daily unique user addresses actually still continues to be low! This slump is not just news driven. And there is a chance that artificial demand could be a part of the equation, given the current lack of availability of a clear tether audit. For more on that check the article calling for a full tether audit here:
https://steemit.com/bitcoin/@kenraphael/audit-the-teths-a-macro-case-for-why-tethers-need-to-be-audited-for-confidence-to-return-to-the-market.)
These are enough reasons to stay away from day trading or chart analyst readings in the interim to avoid getting sucked into a cycle of buying high and selling low.
So will Lightning strike for Bitcoins? (Apologies for the admittedly not too creative pun use.) First a brief description of how Lightning works.
How Does Lightning Work?
The Lightning network is a form of side chain network linked to the main bitcoin blockchain network. Side chains have existed ever since the first Exchange opened to sell bitcoins. Centralized exchanges are basically side chains. Buying and selling of digital currencies on exchanges are instant and do not write to the parent blockchain on every transaction. But they are centralized. In a decentralized parallel, a side chain or channel can be established directly between two users; where one user deposits an amount in an account on the blockchain potentially to the benefit of the other user. The first user can then make payments to the second user outside of the blockchain, or off-chain, and have it recorded between them, obtaining the necessary signatures for each transaction. At the end of some time period, only one transaction is needed to be posted on the blockchain, representing the final balance of how much the first user has spent on the payment channel they opened on the blockchain.
The Lightning network works in similar manner, but extends this concept over bidirectional channels between the users, and over multiply connected network of channels. The network allows users who do not have a channel between them to link over existing channels of other users to find a connection. This is explained using the schematic below, taken from an article I published on Trustnodes some months ago.
Source: . Trustnodes.com - “The Ideal Digital Currency Needs Scaling Solutions”
Will Side Chains Work?
There are some compelling analyses that state that there is little incentive for users to open channels and fund it with expensive bitcoins sufficient to make Lightning effective as a scaling mechanism. And if there are not enough channels to go through, then most transactions continue to take place on-chain and continue to require the regular bitcoin fees and take the average of 15 minutes or more to get mined. The work by Jonald Fyookball, Prof. Jorge Stolfi, and Egor Homakov, with rebuttals to the former by Bitgo Software Engineer, Murch, and Diane Reynolds will make a good read for those interested in details of the derivations behind these arguments.
However, I believe that the demand for fast and cheaper bitcoin transactions are significant enough that Lightning could indeed see some significant adoption. But that adoption could also quickly consolidate in form of centralized nodes that provide the liquidity for those channels to stay open. If so, this should be in the medium term. On the long term, cryptocurrency use will likely continue to increase. At this point, it is not certain that much of that increase will continue to pass through Lightning network channels. The next few months will be interesting for those who love analyzing data and watching the evolution of technology and its adoption.
As far as the markets, the use of the new Lightning network even if it catches on will likely take weeks to months for its deployment to penetrate to users and tools. However, if early indications show promise, this could be sufficient to improve outlook even in the short term. So those interested in this development for investment purposes would also do well to watch how adoption is going in the next few weeks.
References
Leigh Cuen, March 15 2018 Lightning Labs Launches Beta With Twitter CEO Backing, https://www.coindesk.com/a-version-of-bitcoins-lightning-network-is-ready-for-real-money/ Accessed Mar 15 2018.
Joseph Pook * Thaddeus Dryja, Jan 14 2016, “The Lightning Network: Scalable Off-chain Instant Payments,” https://lightning.network/lightning-network-paper.pdf, Accessed October 31 2017.
Ken Alabs, Nov 5 2007. “The Ideal Digital Currency Needs Scaling Solutions,” http://www.trustnodes.com/2017/11/05/ideal-digital-currency-needs-scaling-solutions, Accessed November 30 2017.
Jonald, Fyookball, June 26 2017, “Mathematical Proof That the Lightning Network Cannot Be a Decentralized Bitcoin Scaling Solution,” https://medium.com/@jonaldfyookball/mathematical-proof-that-the-lightning-network-cannot-be-a-decentralized-bitcoin-scaling-solution-1b8147650800, Accessed October 31 2017.
Jorge Stolfi, July 2017, “Responding to Murch's "Responding to Jonald Fyookball's article" article,” ~~~ embed:btc/comments/6jxem4/responding_to_murchs_responding_to_jonald/ Accessed October 31 2017. reddit metadata:fGJ0Y3xodHRwczovL3d3dy5yZWRkaXQuY29tL3IvYnRjL2NvbW1lbnRzLzZqeGVtNC9yZXNwb25kaW5nX3RvX211cmNoc19yZXNwb25kaW5nX3RvX2pvbmFsZC8gQWNjZXNzZWQgT2N0b2JlciAzMSAyMDE3Lnw= ~~~
Egor Homakov, December 16 2017, “Why Lightning and Raiden Networks Will Not Work” https://medium.com/failsafe/why-lightning-and-raiden-networks-will-not-work-d1880e4bc294, Accessed December 31 2017.
Murch, June 27 2017, “Rebuttal to Mathematical Proof That the Lightning Network Cannot be a Decentralized Bitcoin Scaling Solution,“ https://medium.com/@murchandamus/i-have-just-read-jonald-fyookballs-article-https-medium-com-jonaldfyookball-mathematical-fd112d13737a Accessed October 31 2017.
Diane Reynolds, July 2 2017, “Simulating a Decentralized Lightning Network with 10 Million Users,” https://hackernoon.com/simulating-a-decentralized-lightning-network-with-10-million-users-9a8b5930fa7a, Accessed October 31 2017.
About the Author
Ken has a doctorate in Engineering, and a master’s in Computer Aided Engineering, An IT professional, programmer and published researcher with over thirty publications in various fields of technology, including several peer reviewed journals and publications.
Legal Disclaimer: I am not a financial adviser and this is not financial advice. The information provided in this post and any other posts that I make and any accompanying material is for informational and educational purposes only. It should not be considered financial or investment advice at all. You should consult with a financial or investment professional to determine what may be best for your individual needs.
This is only opinion. It is not advice nor recommendation to either buy or sell anything! It's only meant for use as informative, educational, or entertainment purposes.
If you liked the article, upvote it so more people can see it, and follow or check for earlier and future in-depth articles on technologies such as blockchain and artificial intelligence.
Hope to see bear market turn into bull soon. Its getting so boring.
😇
What I have experienced in my previous days or if I say in a year and looking forward I believe lightning is the future of bitcoin and if bitcoin has to survive then it will have to be implemented.
If we look at the current scenario, the time one transaction takes to go through and sometimes fee we have to pay, that is too much.
Steem transactions are free & instant.
One more leg down to 7200 than were bouncing hard watch this!
If this is based on "analysis" from a chart reader, the problem is they said the same at 10,000, then at 9,600, then at 8,200, and now it's 7,200. They even saw all manner of bounces, rising wedges, and inverse head and shoulders. Yes at some point it would reach a bottom and they would claim to be right. And if it isn't 7,200 there would be no apology or explanation, they'll just point to a new support line.
The leak of regulation, together with the undeclared war of big corporations toward the young crypto world (e.g. goole & fb ban on crypto ads ) slow down the adoption. Ligning unfortunatelly is not the answer for the stated problem, but definately the big technical improvement.
See the Bitcoin unique wallet usage graph:
Its a really nice information and it is a fact written in the blog. I agree with your post. Thanks for sharing such a valuable post.
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Thanks for explaining the lightning network and side chains. They work in theory, let's see how they work in action. As far as the price dropping to $5,000 nobody knows but we have to test $6500 first. It's funny how when bitcoin was at $19,000, people thought it would hit $50k. When it's low people think it'll keep dropping. Obviously, things don't go down forever and go up forever. We could very well be finding good support at this level.
This article is not claiming the price will drop to $5,000. Arguing against that maybe comes from a mindset of following too many chart readers. I do not project or predict prices but only analyze technology and the fundamentals behind them. Please try not to glam on to a number as a target from this article.
If one goes to a mindset of fundamental value investing rather than a daily trading one you'll see that there is little difference from a risk/reward standpoint between buying at $6,500 or $5,000 if the technology is indeed valuable to the point that it gets to say $50,000 in some months or few years.
Hi, thanks for the informative Post.
Isn't the Lightning Protocol open Source? And Lightning Labs is just one of many who are implementing their Version of it? Will be interesting to see which "Lightning Network" will make it in the long run. Please correct me if I'm wrong...
We are already in Alpha 0.3 and things are looking great
This is a great game! 😍
nice post @kenraphael
I tested the lightning network and in my opinion it will be too complex for the mass market. You find my article here
https://steemit.com/crypto/@ra213/i-tested-the-lightning-network
Nice review. I hope those asking how to use Lightning will check this out.
Very good article and properly referenced, good work @kenraphael It's defo a desired feature enabling quick and cheap transactions, however would security not be compromised? One could even question the whole point of such sidechains. If a specific blockchain is not designed to handle more transactions then why propose workarounds and not simply move to more advanced modern blockchain implementation?
Very good point. That might very well be the direction that wins out in the long run. There are indeed projects working on blockchain that scales right on the blockchain. I expect to be reviewing a few of those very soon.
Exchanges are sidechains.
Very good point.
It also shows if single nodes get too big, they become attractive for hacking. Lightning network should automatically flatten this out a bit.
Funny we did not see wallet to wallet transactions via exchanges yet. Or did I miss sth?
Thanks and right. There is indeed some wallet to wallet instant transactions. For instance, on Coinbase you can send bitcoins to fellow Coinbase members. And using just their Coinbase email address as well. And the transactions are instant because they are done off-chain. Kind of Paypal like. That's another thing Lightning and side chains could potentially do, which is introduce some familiar transaction conveniences that first generation blockchains do not accommodate themselves.
Very happy that there are different approaches to solve the transaction bottlenecks of the major coins... ..also I am not really convinced of Lightning.
Not only time is a sensitive matter but also the huge problem of energy consumption per transaction. I believe those issues have to be solved with new protocols (as caspar for ETH) or other options for all coins and tokens to be ready for the near future.
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Well, this does look the least bit spammy at all.
😐
Yup that does look like it's been generically pasted in many places already :)
Maybe the poster assumes this is fud. People really need to settle down. Things will be fine in the long run.
Not a chance. Merely spam.
This post has received a 8.42 % upvote from @boomerang.
Great article and fantastic references. It will be interesting to see how lightning develops. I too read articles about it potentially creating centralization problems for users. It goes back to the original issue of how to efficiently utilize Bitcoin as a viable currency. Perhaps this is just not possible with today's tech options? What are your thoughts please?
@kenraphael - interesting post... on the Lightning Network and other "side chains" to Bitcoin. I don't fully understand all these side chains- only that they are exchanges that allow for quicker processing of Bitcoin transactions that will eventually be written to the main Blockchain or something to that effect.
Now they tell us- this is Centralization. Centralizing the Decentralization...? ;) Doesn't make much sense to me. I thought that Decentralization was the catalyst for this new frontier of Cryptocurrencies? Oh, well I hope that there continues to be more progress in the crypto world & new avenues of finance and opportunities abound for everyone.
Great post, keep up the nice work. Upvoted!!
It should be noted that Lightning Network in of itself is not a sidechain in the fashion typically imagined. That's why there are drawbacks to it and not everyone considers it an optimal solution.
Good to see a release. Now let's get on with building Bitcoin SL and Bitcoin Cash as independent projects. Let's start to see what works and what doesn't, rather than endlessly throwing mud at eachother.
Yes it would be good to see what eventually works. I hope this article is not considered among those engaged in throwing mud at each other though. I do not focus on where that is being done but simply on the merits of the various forms of the technology and the data that comes out of their deployment.
Not at all. This was a good piece. I reblogged it.👍
I guess I'm glad it's finally out, even though I would have expected it to have an impact on BTC price, which it hasn't.
Probably still too early. Most watchers are unable to tell if it would have an impact so it hasn't influenced price much. The closest recent thing most watchers can compare it with was the introduction of Segwit, which showed to have little influence on number of transactions per block for months after it was introduced.
please follow me @putra2017
Why should I? You could at least have given a few reasons for me or anyone to do that.
I am new in steemit, sorry if it is not pleasing @kenraphael
If you keep doing that, others will flag you. I upvoted you to encourage your journey on steem. But I noticed posting unrelated comments or pleas to be followed is usually not encouraged here. Try to learn all you can about steem, about not spamming, and make great posts and you will be followed and have a good productive time. Good luck.
This is just a beta release. It's meant for developers and advanced users. This type of release is already baked into the price. If it came out that Amazon opened a lightning node on version 1.0 you could expect fireworks.
Still great news though!
Written in a way, that I can finally explain lightning to others... thank you. Especially the issue with centralized nodes will lead to a lot discussions, but it might be a key to mass adaption too, in order politics want more regulation (which actually means control). A future could be a centralized coin for the masses with tousands of transactions per sec and one or two anon-coins for the enthusiasts, misfits and scammers... that's why I hold both.
resteemed
Very interesting and detailed article. Perhaps I have overlooked it but how can I use the lightning network?
We need to find wallets that implement it next. I'll post that here after gathering info on that in the next few days maybe; unless it becomes so obvious or the information is already duplicated in many places by others.
(Edit: Someone above on this blog mentioned a potential wallet implementation already.)
I hope this will affect the price of crypto today... unfortunately, google fud is stronger than the good news we have today. Fuck Google.
Even in the medium term google "fud" will not affect much I believe. The years bitcoins was recording growth year on year it wasn't due to help from google ads. If the daily user growth rate returns the value will likely begin to go up again regardless of any position google is taking on bitcoin ads.
The upvote does not in any way endorse the entire post. Particularly the use of invective directed at the organization.
Does this relate to the application Abra? My husband was mentioning it to me last night. That it's the first exchange app on the lightning network. Is this considered the first integration step to the lightning network?
Yes wallet integration of Lightning is one major ramp to utilizing Lighning for bitcoin transactions. Not sure if Abra has implemented it though. The app description looks good but I saw no information on their current site showing that Lightning is integrated at this time.
hi @kenraphael, It's great post bitcoin! I enjoyed your content. Keep up the good work!
It's always nice to see good content here on Steemit! Cheers :)
thats why the sharks and whales are dumping the coin right now, get more cheap coin and enjoy the bump
This article is very interesting to read. I just love it, and I'll wait for the next article..
Very informative and helpful article. Please keep continuing.
Interesting and well reflected article, thanks for sharing this
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Nice update here
Please what's your take on dent coin?
Dent with the Mobile App? Looks interesting. There might be space for blockchain sharing of mobile data in this manner, even though I tend to be skeptical about a lot of blockchain startups that introduce unnecessary coins. I might review in detail in the near future.
what are your thoughts on BitcoinZ that has all this allready?
Not familiar with BitcoinZ. I might look it up. However, network effect is also important and how many people are in BitcoinZ. If BitcoinZ has a feature and Bitcoin also has it - you can probably tell which would be effectively redundant.
when it head up to the moon, it will never come back again.
You got a 16.67% upvote from @postpromoter courtesy of @kenraphael!
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This post has received upvote from @fakheralamsher.
thank you for posting good and useful post
12.98% @pushup from @kenraphael
A good and informative analysis. I shall be waiting for your posts. I think you have a really deep study about Bitcoin.
Great article though. Thanks for sharing
nice post about bitcoin ^^
very informative post about crypto. thanks for sharing such a great post.
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You asked and I checked. Upvoted the one on the eel delicacies.
But not this comment just because it's not related to this article.
This post was resteemed by @steemvote and received a 23.76% Upvote