Microtransactions used to be a major selling point behind Bitcoin. The ability to send very small payments for an almost nonexistent fee was a huge breakthrough. And at one point, just a few years ago, sending a transaction cost a few cents. Over time, however, due to increases in BTC’s value and a surge in its popularity, the cost has gone up significantly, turning many away from it. However, there is a possible solution that has been proposed: the Lightning Network.
To start off, it’s important to note that fees are paid on every transaction. If, for example, we agree that I’ll settle a debt with you by paying $0.50 per unit of work you do and you’re doing one per day, I’d be paying that same fee every single day. Considering the fee is as much as $7.50, depending on the value of BTC and the blockchain overload, that gets expensive quickly. And it costs you a lot as well, being that when you merge inputs or otherwise send coins, you’re paying for every single transaction I sent. Back when it was a cent or two to send something, it wasn’t a big deal – 100 transactions would be $1.00, for example. Now, though, that same 100 could be a whopping $750!
The Lightning Network was proposed long ago as a solution for this problem. Essentially, how it works is you send your funds to a “channel,” and then you can pay/accept via that channel as needed. To help better illustrate, let’s assume you make a lot of purchases on eBay for $1 each. Rather than keep sending $1 at a time to them, you could send $100 to the payment channel. From here, you can then send $1 payments without incurring fees on the blockchain, since it’s all handled internally. Once the payment channel closes, you then either get a refund, nothing, or a payment, depending on your balance. This lets you incur a single fee and still be able to use funds as you wish.
Now, one of the biggest issues here is that transactions are not happening in real-time like they would be if you were using the blockchain itself. While you may have just received $500, that might not be usable for days or weeks, depending on how long it takes for the channel to be closed out. As a result, funds are essentially stuck in limbo. Now, this isn’t an issue if you weren’t planning to get anything back (such as in the eBay example above), but it can cause complications if you’re sending more than you need just to be sure you won’t have to add more to it. And being able to withdraw funds exactly when desired is definitely a huge selling point of on-blockchain transactions, though it simply isn’t feasible for microtransactions.
While Bitcoin is very slow to adopt changes to its protocol (which is understandable, considering it is worth $100bn+ right now!), Litecoin has already been tested successfully with the Lightning Network. It has been said that SegWit’s implementation on Bitcoin Core is a step in the right direction for getting LN added as well, though that still hasn’t happened yet and it’s not clear when that will happen – or even if, when we take into consideration the death of the New York Agreement and SegWit2x!
It is a very, very common thing among crypto traders to move their funds via altcoins. They’re pretty much all cheaper, and a great deal of them are even faster. Dogecoin, for example, costs a fraction of a cent to send and can be fully confirmed in minutes. Compare that to Bitcoin’s $7.50 and sometimes hour+ waits and it just makes sense. Though it is worth noting that moving in and out of coins through trading does come at a cost, both in trade fees and price fluctuations. But until the LN is implemented with BTC, the choice is to either keep paying high fees and wait long periods or move to alts when shifting funds.
