The Bitcoin Lightning Network & Lightning Pay
Lightning Pay is the easiest and most cost-effective way to buy and sell Bitcoin in New Zealand. in this article Lightning Pay Director Rob Clarkson shares why Lightning Pay exists and the story behind the Bitcoin Lightning Network.
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It might seem a strange thing to say, but we didn’t want to build Lightning Pay, but this was the business we needed to see in New Zealand. Why does Lightning Pay need to exist? Well it turns out it’s quite an interesting story…
Back in the early days Bitcoin’s base layer was sufficient. Fees were cheap and people were mainly using Bitcoin as a store of value or as a speculative asset, very few were using Bitcoin as a medium of exchange.
Typically you could transfer thousands of dollars and pay fees of just a few cents, in the really early days transactions with no fee were mined. There was no need to be concerned about fees. However, when the Bitcoin network started to get more popular, fees started to increase.
You might well ask “what made fees increase?”. The Bitcoin transaction fee rate is actually a free market. You pay as much as you want for a fee, and if someone is paying more than you, miners will prefer their transaction. In the miners eyes the transaction with the highest fee rate will have the highest priority. This is simply because by mining that transaction the miners earn more Bitcoin.
Why is it that fees have to increase though - why don’t we increase the amount of space on the blockchain for more transactions? Then we can keep fees low! Indeed, there was a fairly big disagreement in the Bitcoin space about whether block space should be limited or if the block size should just be increased. This led to one of the most significant events in bitcoin's development and history - a “hard-fork” that literally split the community, and blockchain in two! There is a book about this disagreement called “The Blocksize War”. You could make your own decision about which way you wanted Bitcoin to go, and the overwhelming agreement was to keep block size low and maintain decentralisation.
The important thing to note is that Bitcoin’s power feature is the fact that it is very decentralised. You can run a Bitcoin node on a slow internet connection and a very small computer. Increasing the blocksize would increase the bandwidth and processing requirements of a Bitcoin node and decrease its centralisation because only big computers with fast internet could run them. Maintaining Bitcoin’s decentralisation was paramount, as this is one of the things that makes Bitcoin special.
Bitcoin attracts some of the brightest minds in the world and these developers realised very early on (2016) that fees will increase and that would make smaller transactions uneconomical. One proposed solution was another “layer” to Bitcoin, essentially a payment network built on top of Bitcoin called The Lightning Network. This would mean we could increase the number of transactions without increasing the blocksize.
The Lightning Network is made out of “payment channels” which are really just joint bitcoin wallets. If Alice and Bob open a joint Bitcoin wallet then Alice can pay Bob instantly by signing a transaction paying Bob some of the funds from their joint wallet. Bob can hold onto that transaction without broadcasting it because he might want to send some funds back to Alice.
With this mechanism you can see that we can then combine a lot of lightning transactions into one on-chain transaction. Furthermore, as lightning transactions only require a signature and do not need to be mined by a miner they settle instantly. Lightning network transactions are therefore much cheaper than on-chain transactions. This means the Lightning Network is ideal for use as a medium of exchange.
The Lightning Network is ideal for use as a medium of exchange.
The Lightning network has its own technical challenges, it is certainly not a perfect solution, but it allows for innovation while maintaining the core principles of the Bitcoin network. The Lightning Network is emerging as a new open payments standard that can connect various different systems. The lightning network has its own trade-offs but can be used right now to pay for goods and services online. I also think a much overlooked use of the lightning network will be machine-to-machine payments.
This is where Lightning Pay steps in. We created the cheapest, easiest and most convenient way to convert from Bitcoin to NZD and back again. It was not our dream to create a payment platform or Bitcoin brokerage, but we needed to see one in New Zealand. We could not sit back and watch New Zealand stay disconnected from this new global payment network. So we built the change we wanted to see.
We think Lightning Pay is the best place to Buy Bitcoin in New Zealand. We’d love to hear what you think, come and try it out!
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Rob Clarkson is Co-founder of Lightning Pay, a New Zealand based Bitcoin Lightning Brokerage and payment platform. When he is not building Lightning Pay he loves Biking, Snowboarding and Surfing.
