Real-world use cases for the Lightning Network
While Bitcoin was an enormous breakthrough in payments technology, years after its inception there were lingering issues. Mainly, that fees were too expensive to conduct transactions of small amounts, and that the network's speed and throughput weren’t as reliable as they could have been. But that all changed in 2015, when two Bitcoin-obsessed engineers, Joseph Poon and Thaddeus Dryja, conceptualized what would later be dubbed the Lightning Network.
That's the year when Dryja and Poon published their white paper, “The Bitcoin Lightning Network: Scalable Off-Chain Instant Payments," in which they proposed an additional layer of code upon the existing Bitcoin network. The Lightning Network was designed to be that second layer, processing transactions on top of Bitcoin’s blockchain to enable Bitcoin scalability, micropayments in mere millisatoshi (the smallest available unit of bitcoin), and instant settlements.1
The Lightning Network's name was chosen for obvious reasons (it's fast!), and its utility and use cases—from remittances to gaming—continue to proliferate. As adoption of the Lightning Network expands, it has the potential to disrupt even more industries, verticals, and communities.
How and why the Lightning Network exists
The Lightning Network functions using three primary technologies: nodes, channels, and gossip. A node is a machine running a Lightning Network implementation, such as LND, Core-Lightning, LDK, or Eclaire. Nodes perform two primary functions: establishing channels with other nodes and gossiping about those channels.
Gossiping is simply a routing protocol that allows multiple nodes to easily and reliably send information back and forth on the Lightning Network. When two nodes create a channel, they can send payments back and forth to each other along the channel in a trustless manner, instantaneously and with zero fees.2
The Lightning Network is what's called a second-layer (Layer 2) solution built atop Bitcoin's primary Layer 1 blockchain. Layer 1 blockchains like Bitcoin or Ethereum are the foundational protocols that provide the core consensus and security mechanisms for transactions to occur. Layer 2 solutions allow for additional apps, functionality, and scalability.
Addressing the scalability limitations in Bitcoin's Layer 1 technology was the primary goal of the Lightning Network. Transactions couldn't scale, associated fees were high, and speeds were unreliable depending upon network congestion. If Bitcoin was truly to gain mass adoption, its performance had to be drastically improved.
By taking transactions off-chain, the Lightning Network helped solve these issues by boosting potential transaction throughput, reducing fees, and enabling instant transactions. Lightning Network is capable of processing between 1 to 3 million transactions per second (TPS).3 Micropayments could be processed down to fractions of a satoshi with almost no fees, and the network also enhanced privacy by taking transactions off-chain.
In short, the Lightning Network enhances the capabilities of the Bitcoin blockchain by creating multiple channels between multiple users in a way that makes transacting faster and cheaper than on Layer 1 and with even more privacy.
How the Lightning Network is used today
The Lightning Network has the potential to transform wide-ranging aspects of digital transactions and financial applications. By enabling faster, cheaper, and more scalable transactions, it unlocks a myriad of use cases that were previously unattainable with Bitcoin's Layer 1 alone.
From micropayments and remittances all the way to gaming, the Lightning Network continues to change how society interacts with financial systems and digital currencies:
Micropayments, or nano payments, enable small-value transactions for digital goods, services, or content with minimal fees and latency. They open up new possibilities for monetizing digital content, such as pay-per-article news platforms or micro-donations to support creators and online communities. One example of how the Lightning Network is used for micropayments is through the Nostr protocol, a decentralized social network.4
Nostr is a social media platform application that integrates with the Lightning Network, allowing users to send and receive micropayments within the interface by giving “Zaps”.
The Lightning Network also facilitates faster and cheaper cross-border money transfers, drastically improving the efficiency of sending funds globally. Users can bypass traditional financial intermediaries like SWIFT, reducing transfer fees and processing times, and ultimately making it more cost-effective and accessible for people to send money across borders.
Strike, for instance, is a mobile app that employs the Lightning Network for remittances. It enables users to send and receive bitcoin or fiat currency quickly and with minimal fees, making cross-border payments more efficient and cost-effective. Users seamlessly connect with crypto wallets, bank accounts, or debit cards, avoiding slow processing times and prohibitively high fees.5
The crypto and gaming communities often intersect in unique and interesting ways, and the Lightning Network is no exception. The Layer 2 technology enables instant and low-cost in-game transactions such as item purchases, as well as facilitating cross-game asset transfers and decentralized gaming economies.
THNDR Games infuses the excitement of Lightning into their mobile games, creating thrilling and immersive experiences that keep players engaged and entertained. With their focus on community building and data-driven game development, THNDR Games combines cutting-edge technology with creative game design to bring lightning-fast fun to gamers everywhere.6
Notably, Lighting can also streamline settlements for merchants, reducing transaction times and lowering costs compared to traditional payment systems. Instant settlements let merchants and businesses receive payments more efficiently and reduce the risks associated with transaction delays or volatility in the cryptocurrency market.
Take the payment processing platform OpenNode, which allows merchants to accept bitcoin payments via the Lightning Network. Here, again, the near-instant settlements significantly reduce transaction fees compared to traditional on-chain transactions. Merchants can secure their funds faster and swap bitcoin for their native currency immediately to avoid price fluctuations. They even have Stripe and Shopify integrations.7
These are just a few of many current and potential use cases of the Lightning Network. As more users, organizations, and merchants adopt the Lightning Network, more use cases will emerge, potentially making the Lightning Network an essential part of the global payments ecosystem.
Utility of the Lightning Network is expanding
The Lightning Network's potential goes beyond the realms of cryptocurrency and the blockchain. As Bitcoin's prevalence as a form of payment increases, the Lightning Network might be used for things like machine-to-machine payments, dynamic streaming payments models, and Internet-native payments.
Here are just a couple Lightning Network use cases that are showing promising development:
The Lightning Network could be used to connect Internet of Things (IoT) devices, and employ smart contracts that would enable machine-to-machine payments autonomously. The goal is to create a means for seamless, low-cost transactions between interconnected devices, paving the way for innovative applications in areas like smart cars, manufacturing, and beyond.
Distributed Charge is a current project demonstrating the Lightning Network's capacity to facilitate IoT payments. The proof of concept links an electrical charging station with the Lightning Network for seamless, automated, and near-instant payments for charging services. Once smart cars are incorporated into the network, drivers could potentially pay their electric fuel bill via automated communication between the charging station, vehicle, and user's wallet.8
Electrical smart grids
The Lightning Network also has the potential to revolutionize the way electricity is bought and sold via blockchain-powered smart grids. By enabling instant and low-cost micro-transactions, parties can exchange small amounts of electricity between each other. Consumers and producers could share and transact in either energy or bitcoin in a trusted way without a middleman.
By using smart meters to measure the amount of energy generated and consumed—and the Lightning Network to facilitate instant and low-cost payments—households or small-scale producers could sell their excess energy to their neighbors or the grid. This could help to increase the use of renewable energy sources and a more efficient energy marketplace.9
Both current and future use cases underscore how critical the Lightning Network will be in the future of payments. With so much "smart money" banking on the Lightning Network's essential role in the future of payments, innovative businesses will start learning about, building on, and transacting with the Lightning Network sooner rather than later.