Have you ever thought about setting up your own Bitcoin node? Have you dreamed of the riches you could accrue by mining Bitcoin 24 hours a day, 365 days a year? If so, it is time to stop dreaming and start doing. You too can now operate a Bitcoin node - sort of.
No, you will not succeed as a traditional Bitcoin miner without a significant financial investment in hardware and infrastructure. But you can set up and run a new node for Bitcoin's alternative layer known as the Lightning Network. You can even earn a little BTC for doing so. You will not get rich running a Lightning node, but that's not really the point.
The people behind Lightning know full well that they need a large number of nodes in order for the network to succeed. So to incentivize new operators, those who run the nodes are allowed to charge service fees for processing transactions. Those fees constitute profit to the operator. It's not much - only 0.25% to be exact - but it is profit, nonetheless.
About the Lightning Network
The Lightning Network is a second layer network that operates on top of the standard Bitcoin blockchain. It is also a protocol in the sense that it processes BTC transactions with the eventual goal of adding said transactions to the blockchain. It is different in how it handles its tasks.
A large transaction that normally runs through the primary Bitcoin network is treated as a separate entity in and of itself. All of its data is recorded in the blockchain ledger. Transactions processed on the Lightning Network are processed differently. They are grouped together before being added to the blockchain.
Let's say you have a set of 1,000 minor transactions being processed by Lightning nodes. Only the starting and ending addresses of each transaction is record for the purposes of making it part of the blockchain. They are all grouped together as a single transaction when they are eventually added to Bitcoin's ledger.
How it works
A good way to understand this is to compare it to depositing multiple, small amounts of fiat at your local bank - but as a single deposit. This is easy to picture if you imagine yourself running a brick-and-mortar retail operation in the city center.
Throughout the day you might make 100 sales at $5 apiece. You could theoretically take 100 five-dollar bills down to the bank and deposit each one individually. But that would be an awful lot of work and effort for something that could be done a lot more easily by combining all those bills into a single hundred-dollar bill. That hundred-dollar bill is the one you deposit at the bank.
For all intents and purposes, your bank doesn't need to know about all the individual transactions that constitute your deposit. Your bank is only concerned about your starting and ending balance; you keep records of the 100 transactions for your own purposes. Your deposit goes through much more quickly, the bank has less information to worry about, and everyone is happy.
This is essentially the Lightning Network in a nutshell. Its purpose is to reduce the workload on Bitcoin's primary network by handling minor transactions. Although the network is still in beta stage, it is already handling tens of thousands of off-chain transactions like social media tipping, and low-value online purchases.
Why it is necessary
Given that Lightning Network transactions eventually make their way to the Bitcoin blockchain anyway, you might be wondering why the network is even necessary. The need for Lightning can be encapsulated in a single word: scalability. What Bitcoin promises as an alternative payment system for the masses it sorely lacks in its own scalability.
Unfortunately, the model on which Bitcoin was built does not scale well. It cannot. By the very definition of a blockchain and how it operates, scalability is elusive. As such, Bitcoin becomes more cumbersome the longer its blockchain grows. An ever lengthening blockchain makes mining harder. It makes mining more expensive as well. Worst of all, it slows down transaction times.
The Lightning Network is seen as a necessity to solve Bitcoin's scalability issues. There is not much that can be done to alter Bitcoin's underlying code and still stay true to its foundational principles. The Lightning Network can step in as a separate layer that addresses scalability without undermining the original code.
Still, why is it necessary? Because it takes about 10 minutes to acknowledge a single BTC transaction these days. Depending on traffic volume, minor transactions that do not pay as much to process can take weeks to finalize. That cannot be allowed to continue if Bitcoin is to someday compete with the likes of Visa and MasterCard.
The nature of Bitcoin's network makes it prohibitively slow compared to most other payment networks in the traditional financial sector. That is one of the reasons Bitcoin has not yet enjoyed the widespread adoption many of its pioneers had hoped for. If Bitcoin is ever to become an alternative monetary system and payment platform for tens of millions of people around the world, it has to get faster. That is what the Lightning Network is all about.
The more nodes the better
Knowing what we know about the Lightning Network, it should be obvious that the network's abilities increase commensurate with the number of nodes on the network. To be as blunt as possible, more nodes are better. A larger volume of nodes means a larger processing capacity to take more pressure off the Bitcoin network.
According to Cryptonews, the Lightning Network already boasts more than 10,000 nodes with nearly 35,000 payment channels. Its capacity currently stands at more than 820 BTC which is the equivalent of USD $7.3 million. This is where you come in. You can get your hands on some of that coin by running a node of your own.
A Lightning node is nothing more than a beefed-up computer with the software necessary for processing transactions. Every node on the network offers payment channels through which transactions can be run. The more payment channels you have to work with, the more opportunities you have to receive transactions from the network.
The thing to understand is that the Lightning Network focuses almost exclusively on micro-payments right now. Transactions are processed by being run through a series of nodes until complete. Sending nodes look for the optimal path through which to send data, meaning they are looking for nodes with low fees and plenty of capacity.
Like electricity flowing through a circuit always takes the shortest path, transactions moving through the Lightning Network take the most optimal path to completion. This forces node operators to compete with one another. The end result is a network that offers lower transaction fees and higher speeds.
Helping the network grow
As previously mentioned, you will never get rich running a Lightning node. Even if you were to process the equivalent of $20,000 in transactions each month, a transaction fee of 0.25% would net you revenues of just $50. That may not be enough to break even depending on how much power your equipment consumes.
So why do it? The primary reason is to help the Lightning Network grow. Remember that the more nodes, the better. Every new node added to the network increases capacity and subsequently takes some of the load off the Bitcoin network. It is a win-win for both networks.
It is generally accepted that more transactions will be offloaded to the Lightning Network as it grows. In addition, growth should mean higher processing fees at some point down the road. So while node operators may have trouble breaking even right now, there is the promise of a decent return on investment in the future. But in order to get that return, the network has to add more nodes.
Bitcoin's future with Lightning
We close out this post by discussing Bitcoin's future in relation to the Lightning Network. As Cryptonews contributor Alex Lielacher so eloquently put it in a November 10, 2019 piece, Lightning will prove to be either "the long-awaited solution to Bitcoin's (BTC) scalability woes or a technological experiment that is bound to fail."
At this point, no one knows the long-term viability of Lightning. If it succeeds, it could lead directly to Bitcoin being accepted globally as a digital payment system and an alternative to traditional payment networks. It could lead to merchants accepting Bitcoin payments as readily as fiat. But if the Lightning Network fails, Bitcoin has a serious problem.
The Lightning Network, as it currently stands, offers Bitcoin its best hope for becoming the preferred alternative monetary system for the masses. A failed Lightning Network would be a huge step backward for Bitcoin as it seeks to overcome its own limits. Scalability would continue to hinder Bitcoin to the extent of permanently relegating it to a store of value rather than a day-to-day monetary system.
Yes, you too can operate your own Bitcoin node of sorts. If you are interested in being part of developing the Lightning Network, there is plenty of room. Perhaps we will use another post to explain how to do it. We'll see.