The Lightning Network makes Bitcoin transactions much faster and with fewer fees. If you feel Bitcoin will grow in the future then you might be wondering how you can earn money with this network.
One way to invest in the Lightning Network is to buy and hold Bitcoin. The more people that buy and hold bitcoin the more demand there will be for the Lightning Network. The second way is to run a lighting node and the danger is you could earn very little in fees.
Keep reading and I’ll share how the Lightning Network works, how it got started, what it takes to run a lightning node, the pros and cons with it, if it’s private and how the network makes money.
How does Lightning Network Make Money!
The easiest way to invest in the Lightning Network (LN) for short is to buy and hold Bitcoin. The more people support Bitcoin the greater the demand will be that this network is needed.
If only 100 people used Bitcoin there would be NO need for a network to speed up transactions.
The second way to invest in this network would be to run a lighting node. A node is when someone connects to the network. If you purchase crypto through an exchange you’re NOT running a node.
With Bitcoin, there are 2 types of nodes.
- A full node downloads the full blockchain and helps validate transactions. (you need 500+ Gig of HD storage)
- A lightweight node handpicks the most important data when downloading or processing transactions.
You don’t get any financial rewards for running a Bitcoin node.
A lightning node is completely different than a Bitcoin node. There are “a lot” of requirements.
- VERY high requirement for hard drive space, reliable internet and more.
- You need a FULL Bitcoin node to run the lighting node.
- When running a Lightning Node you have to be online at all times.
- You also have to have a backup of the Bitcoin blockchain.
- Have a backup of the Lighting Network.
- Have a backup of channel states. (What was going on)
- Manage channels and liquidity. (You need enough Bitcoin)
What the Heck is the Lightning Network?
One of the largest challenges to Bitcoin is scaling. Scaling is being able to support more transactions with less waiting time. Currently, the Bitcoin network can only handle around 7 transactions per second. Visa can handle up to 65,000 transactions per second.
Bitcoin has a block size of 1 MB and thus only so many transactions can be recorded on each block. This is why there is a fee for each block being created by the miners. Based on supply and demand the fees will increase if MORE people want to use the Bitcoin blockchain.
The problem with increasing the block size or having more blocks is security and it creates more problems. Bigger blocks would make the system less decentralized and soon ONLY banks with a large computer could run a node.
This is why there was a civil war back in 2018 leading to the creation of Bitcoin Cash. ALL this drama wasn’t good for the community and there wasn’t another upgrade until Taproot came out and surprisingly 90% of all the miners agreed to the upgrade.
You can learn more about Bitcoin’s Taproot upgrade by clicking on the link HERE.
The next way to speed up the transactions is to process the transactions “off-chain.”
Joseph Poon and Thaddeus Dryja created the Lightning Network whitepaper in January 2016 and it was completed in February 2018.
The celebration of completing the Lightning Network was marked by ordering 2 pizzas on the (LN) by Laslo Hendricks.
Laslo Hendricks also made the VERY first purchase of something with Bitcoin in 2010 for 2 pizzas with 10,000 Bitcoin. I wonder if both pizza orders were from the same person, probably a good friend right?
El Salvador will be the first country to use the Lightning Network for Bitcoin payments.
You might be wondering why is El Salvador adopting Bitcoin and the (LN)? El Salvador is very poor and so many citizens work in other countries to earn MORE money.
Many people send money back to El Salvador to help their families. It’s estimated that 25% of El Salvador’s GDP comes from diaspora remittances (people earning money out of the country).
The problem with using traditional banks is they are slow and there are LARGE fees.
By using Bitcoin and the (LM) it’s going to be faster to send money to El Salvador and most importantly there will be fewer fees.
Another benefit is El Salvador doesn’t have many banks. The cryptocurrency might help those who don’t have a bank, save money and thus get out of poverty.
How the Lightning Network Works?
The Lightning Network is an overlay network and isn’t a blockchain or sidechain. It’s a peer-to-peer network that operates on top of Bitcoin. The goal of the network is to provide very fast and cheap transactions.
It’s used for Bitcoin payments but can also be used for Litecoin and in the future probably OTHER cryptocurrencies.
The Lightning Network uses 2 features of Bitcoin and that is multi signatures and hashed timelocks (setting transactions into the future). Any blockchain that has these features such as Litecoin can use the (LN).
Many cryptos have both of these features, so many others will probably join the network.
The cool thing is that when MORE cryptocurrencies join the network this may mean anyone can trade cryptocurrencies for lower fees than an exchange.
Whoever wants to use the lighting network has to have a multi-signature wallet and have enough Bitcoin in the wallet. Then both parties can transact instantly on the lightning network for LOW fees because they are sending IOU’s.
Potentially, the network could support millions of transactions per second (but it hasn’t been proven yet).
The weakest part of The Lighting Network is your own personal computer power and of course “internet speed.”
Then at the end of the month, all the IOUs are added up and 1 transaction takes place on the Bitcoin blockchain. The MOST important part is both parties have to fund their wallet to ensure they pay the IOUs right?
You might be thinking ok the Lightning Network connects 2 people how does someone send a payment to someone they don’t know?
This is similar to my favorite industry (jokingly) and that is network marketing. You know someone and they know someone and through that 1 person, you can reach someone else.
The payment can go through multiple people that are connected to this network. It travels through the shortest route possible just like lightning.
Someone can create another version of the Network (such as in another language) and all versions can work together thanks to something known as the bolt protocol.
It’s important to know that The Lightning Network isn’t a cryptocurrency and doesn’t have its own token. It’s just a peer-to-peer payment system that runs on top of Bitcoin.
The possibilities of the (LN) are really interesting. In the future who knows maybe you could go to a job and get paid per hour or minute due to this network!
Maybe with TV you could pay per hour (I would like that).
Oh, and what is interesting is the Lightning Network can do more than just send crypto around. Maybe it’s used to send messages from your smart home to your smart car?
Who knows how people will figure out how to use this technology? Many inventions are used differently than how the creator thought the invention would be used. A classic example of this would be Viagra that was used for heart problems, but women loved it!
Is Lightning Network private?
The lightning network is private because all the transactions that happen on the network are not told to anyone else.
The network uses encryption layers called onion routing. Each node can only see the immediate node that it came from and the next node where it’s going.
Everything else isn’t known. It’s not known which path was used or how many nodes were connected.
You could picture the lightning network as everyone puts money in a pile. Then everyone passes IOU notes around and when someone wants to leave they add up their IOUs and take the money they are owed.
The MOST interesting thing about this IOU system is going to be the taxes. It looks like the IRS in the U.S. will only be able to see how much money you put in the pile and what you take out.
Everything else will not be known.
When it comes to taxes it’s best, to be honest, and do your taxes. By not filing your taxes the IRS can come after you forever. If you do your taxes and they are wrong the IRS only has 3 years to come collect.
Doing taxes is a pain in the ass “especially” with crypto and the easiest way to do them is with software. Yep, the software will do almost everything for you and I made a post about the leading software that I hope can help you.
You can view this post by clicking on the link HERE.
Pros and Cons of the Lightning Network
The largest advantage to the lightning network is MUCH faster payments with fewer fees. Another very large advantage is it’s going to scale the system and allow MORE people to participate.
It’s going to be able to adopt altcoins and already works with Litecoin.
Possibly it’s going to act like an exchange and be able to swap coins for “very” low fees. This is really good news to the average person and bad news for exchanges.
Even though it’s going to speed up transactions they will still have the same security as Bitcoin.
All the Bitcoin will be anchored to the main blockchain. The good thing about Bitcoin is that it’s simple and fewer things can go wrong.
Everything in life has pros and cons so let’s talk about some of the challenges. One disadvantage is someone will have to fund this network before they can use it to trade IOUs.
I don’t see this as a BIG disadvantage because how would you use an ATM card if there were no funds in your bank account?
The second disadvantage is the system has to be online at all times. Some areas just have spotty internet connections and why I feel paper money will NEVER go away.
The largest danger to the lightning network is your relying on someone else to run a node and make transactions happen on your behalf.
The whole point of Bitcoin is it’s decentralized. Bitcoin’s block size was small so anyone can run a node with a basic computer. There is NO central point of attack.
With the lightning network, it’s VERY difficult to run a node. Now, the Bitcoin system isn’t as decentralized and you’re relying on a third party to connect you to the blockchain.
Still, the more lightning nodes there are the more decentralized it’s going to be.
The last negative I can think of is the (LN) is only meant for small payments and if a payment is too large it’s going to have trouble because of liquidity.
Oh, and the (LN) is still a work in progress!
The advantages of the Lightning Network far outweigh the negatives. Since I feel cryptocurrency is here to stay this network will only grow.
As of July 2021 there are over 23,000 (LN) nodes with over 1,821 Bitcoin locked up. At this point, you may be wondering how to access this Lightning Network? You would do it through a certain wallet and a popular wallet is the strike wallet that El Salvador will be using. You can learn more about the strike wallet HERE.
Now, of course, some countries will attempt to ban it such as North Korea. Funny enough blue jeans are banned in North Korea.
All this will do is push other countries to run the nodes. This reminds me of a great saying about change.
I seriously went through all 3 stages when I heard about Bitcoin. I first thought it was very stupid, then I thought “who” would be arrogant to create their own currency and challenge the mighty dollar?
Now, of course, I think Bitcoin and crypto will be adopted. The challenge with Bitcoin and other cryptos is how do you earn money JUST by holding the coins.
Well, HERE is a post I made on ALL the different ways you can do this and I hope it will benefit you.
I hope this post on can you invest in the Lightning Network was helpful to you. Bye for now.