Will the Lightning Network make other “fast” altcoins redundant?
The Lightning Network shows promising signs, but aside from early momentum, it may be too early to write-off “fast” altcoins.
On 26 December 2017, the Lightning Network debuted on bitcoin’s Mainnet after a year of controversy, which was at times marked by venomous exchanges among the bitcoin community on public forums. Since its debut, the total number of nodes operating on Mainnet has steadily increased to 233 nodes as at 23 January 2018.
Mainnet is the network of people making transactions with bitcoin across the world. This network basically involves traders, miners and nodes. Traders and miners can operate nodes on bitcoin’s Mainnet, but this does not mean that traders are automatically nodes. Most, if not all, miners are nodes.
For exchanges dealing in bitcoin, it is not necessary to operate as a node; however, for business purposes, exchanges typically do. In order to complete a trade between an exchange and a trader, a channel needs to be opened for the two to connect and execute a bitcoin transaction on the blockchain. That transaction, which is executed on the blockchain, is done over Mainnet.
This may not seem so controversial, but the trouble is that every node has to download and continually sync the entire bitcoin blockchain whenever a new block is added. That is the basis for a distributed ledger of account. The distributed ledger, which is the block of transactions on the blockchain, is distributed to each and every node for public view. This is made difficult by the huge computing power necessary to continue creating new blocks on the blockchain.
The Lightning Network and Mainnet
Those difficulties have led to huge fees for people looking to trade bitcoin as well as lots of transactions never being completed. According to BitInfoCharts, the average transaction fee for bitcoin reached as high as US$55 on 22 December 2018. Since the Lightning Network became operational on Mainnet, bitcoin's average transaction fee has slowly decreased and shows a downwards trajectory. At the time of writing, the fee was US$14.38.
What the Lightning Network does is remove most of the transaction data from the overall blockchain. Basically, if two traders want to settle a transaction, they open a channel, settle the transaction or transactions between themselves and the bitcoin is traded. The data that is entered onto the blockchain is done later, either when the channel closes or when decided by the traders.
With the Lightning Network operating on Mainnet, the number of transactions waiting to be processed has decreased significantly in the last week. This number is called the unconfirmed transaction count or mempool. A week ago, there was an unconfirmed transaction count of about 125,000. That number has nearly halved to about 63,555, according to data released by Johoe’s Bitcoin Mempool Statistics.
This means that transaction fees are down significantly and unconfirmed transactions are also down significantly, although the actual bitcoin price is also down significantly. However, these numbers can be a little misleading since one important piece of information is missing. The numbers don't take into account how many wallets are actually sending bitcoin transactions. From the time the Lightning Network debuted on Mainnet, this number has just about halved as well.
From an average of around 500,000 wallet addresses sending bitcoins on 22 December, 2017, the number has dropped to today’s 283,000 wallet addresses (see graph below). This is important because lower demand on the Mainnet network could be what is decreasing the average transaction fee and unconfirmed transaction count. There is not enough available information available to determine whether the Lightning Network is making a difference on bitcoin transaction fees.
Lightning Network fees are reported to be fractions of a cent, but as yet there is no reliable information from Mainnet that shows this to be the case. The biggest node on Mainnet is a node called SLEEPYARK, which is reported to be owned by Blockstream. Blockstream is a major supporter of Lightning Network development on Mainnet. The only transactions being made by Blockstream are sales of shirts and stickers, none of which have a retail value over US$15. This highlights the immaturity of the Lightning Network at this stage of its development.
One encouraging factor is the level of development on bitcoin’s Testnet. Testnet is one of several testing networks for the bitcoin development community. On these networks, developers smooth out bugs and patch over flaws as part of developing the bitcoin blockchain. On Testnet, there are 1083 nodes operating 3,612 channels. What this suggests is that momentum is building for the Lightning Network protocol to dominate bitcoin transactions on Mainnet.
However, being only in the testing phase, this reinforces the idea that it is too early to know whether the Lightning Network is having an impact. What is certain is that the bitcoin community is beginning to achieve consensus around the Lightning Network, and it is reasonable to believe that it will soon dominate transactions made over Mainnet.
Redundant "fast" altcoins
Does this mean that other “fast” altcoins will be made redundant? One example that comes to mind is Litecoin. Litecoin is marketed on the basis that it provides a faster and more easily processed alternative to bitcoin and comes with lower fees. Litecoin's average transaction fees are just over US$0.25.
At this stage, it is too early to say whether Litecoin will be made redundant because it is not known if Lightning Network transactions will dominate Mainnet. If Mainnet transactions do switch to the Lightning Network, bitcoin transactions may drop to US$0.24 or less. To decide if Litecoin will be made redundant, a trader will need to look at bitcoin's other competitive qualities instead of just focusing on the fees.
On the privacy front, bitcoin will still retain a much higher degree of anonymity in transactions compared with Litecoin, while speed of transactions will be roughly equal, with both being near-instantaneous. Convertibility will also be a big factor for both cryptocurrencies since it is difficult to convert cryptocurrency into useable money, and only a small amount of businesses use either cryptocurrency in business transactions.
Litecoin has looked to develop a payment platform via a debit card system, but no major banks have taken up the idea. As well, LitePay, which is attempting to develop the Litecoin debit card, has seen doubts expressed about its connection to Litecoin itself. This is not to say that Litecoin will be made redundant, but it is important to be aware that bitcoin is more widely recognised and used as a currency than Litecoin.
According to BitInfoCharts, there are 832,177 active bitcoin wallet addresses compared to 152,844 active Litecoin wallet addresses. It could be logically expected for that to increase in bitcoin’s favour were bitcoin to add Litecoin’s "fast" advantages and reduced fees. However, this is only speculation at this point because it is not known whether the Lightning Network will be successful or whether it will come to dominate the majority of bitcoin transactions.
Momentum is slowly building toward the Lightning Network growing on bitcoin’s Mainnet. This will pose a significant challenge to the survival of other “fast” altcoins if that trend continues.