Bitcoin News

Bitcoin Lightning Network Growth Passes a New Milestone

The Lightning Network, a layer 2 payment solution built on top of the Bitcoin blockchain that enables secure, private and near-instantaneous transactions at little to no cost, has surpassed 25,000 active nodes for the first time, an indication that the network is growing stronger with more nodes and more channels. 

Over the past thirty days alone, there has been an 8.01% increase in the number of active nodes to 25,010. A node is essentially a “user” on the network who sets up their computer to interact with other nodes. This way, they can send, verify and receive information; in this case, bitcoins.

As a decentralized network, the Lightning Network has no central data server that stores all of the transactions or interactions between users. Instead, its decentralized network of distributed nodes keeps track of the data, or part of it. 

In order to reduce congestion on the Bitcoin blockchain, the Lightning Network allows users to route their transactions through off-chain channels. All of the transactions that pass through a channel are rewritten into a single transaction and settled on the Bitcoin network, allowing for millions of transactions to be made in the matter of seconds. These channels run between the various nodes that have chosen to connect in this way.

Not every node, however, operates a channel. Currently, the number of nodes with channels is 14,419 or about 58% of all nodes. The remaining 42% are simply there to verify transactions and provide security to the network. 

But for those who do choose to open and fund a Lightning Network channel, there is the potential to earn yield.

Earning yield on the Lightning Network

In order to open a channel, node operators have to “fund” it with a small amount of BTC. Right now that average funding amount is about 0.035 BTC. Whatever amount is in that channel represents the maximum value of any transaction that can be routed through that channel. In return for providing that channel liquidity, node operators collect a small fee when a transaction routes through one of their channels. 

In the Lightning Network, not every node is connected to every other node; that would require far too much storage per node. Usually a transaction has to “hop” through channels, from one node to the next, in order to find a path to its final destination. To accomplish this, the Lightning Network utilizes onion routing from the Tor Network, a privacy-based network protected by encryption, which essentially allows a transaction to hop from node to node until it reaches a target. 

Each hop through a channel requires its own fee – so the fewer the hops, the better. Currently, the average hop distance is 8.8 hops.

Since we last reported on July 15, the number of channels increased to 65,739 and expanded their capacity by roughly 78%, from 1,800 to over 2,300 BTC, according to data from 1ml.

Data as of Aug. 18, 2021
Source: BitcoinVisuals node, 1ml

The increase in channels means that there are more connections between the nodes. Since every single jump between nodes costs a fee, having more channels available increases the chances of finding a more efficient route for the transaction’s final destination. Thus, increased connectivity can greatly reduce the fees associated with sending transactions.

Greater connectivity and more channels also translates to more competition in facilitating transactions. Average fees have dropped below the base fee. Although the base fee for passing through a node’s channels is 1 sat, the median fee that is being charged is only 0.000006 SAT/SAT spent or $0.000000003018/SAT spent.

Furthermore, the network capacity signifies a more developed network because it means that cumulatively, users have “invested” in the network. In order for transactions to hop from node to node, each channel must be funded adequately. The higher the capacity, the more funds can be sent.

Driving forces

The growth is, in part, due to the increasing need for a solution to Bitcoin’s scalability problem which states that Bitcoin is limited to only 7 transactions per second on the base layer. Layered networks like Lightning and sidechains like Liquid have gotten the attention of big names in crypto like CEO of Twitter and Square Jack Dorsey, whose Twitter username now includes a Lightning bolt for the Lightning network.

Earlier this summer, the Lightning Network made headlines when Jack Mallers, CEO of Strike, announced the adoption of Bitcoin as legal tender in El Salvador. In partnership with the president of El Salvador, Nayib Bukele, Mallers’ Lightning based payment app Strike was implemented all throughout the country. 

Now, Mallers is taking an aggressive stance against big centralized exchanges like Coinbase by bringing on app Bitcoin purchase fees to near zero. All of these big moves signify his dedication to fostering the growth of Bitcoin as well as bringing in attention to Strike and Lightning.

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