Binance Will Integrate Lightning Network (LN)

After yesterday’s problem that forced the exchange to temporarily suspend Bitcoin withdrawals, Binance has announced that it will integrate Lightning Network (LN). 

The announcement was made on the exchange’s official Twitter profile yesterday after withdrawals were reactivated. 

According to the announcement, the LN integration will help in the event of future problems similar to yesterday’s. 

What happened yesterday?

The last few days have seen a real boom in transactions on the Bitcoin blockchain. 

In fact, the first of May saw a spike of over 680,000 on-chain transactions in a single day, but by the next day it was back to normal. 

On the other hand, both yesterday and the day before, the number of daily transactions recorded on the bitcoin blockchain was over 600,000 for two consecutive days, while the day before it was less than 420,000. 

It should be noted that levels similar to yesterday’s have never been seen on Bitcoin before, so much so that the peak on 1 May is the absolute all-time high for the number of daily transactions to date. 

The problem is that bitcoin’s blockchain can only handle a limited number of transactions per day, so when requests exceed this capacity, many transactions are not validated within 24 hours and remain pending for a very long time. 

In addition, fees skyrocket because those who pay the most fees get priority in validating their transactions. 

Binance decided to suspend withdrawals precisely to avoid excessive fees, and reactivated them once fees were back in line with expectations.

The Solution: Binance announces Lightning Network (LN) integration

Currently, there is no solution to avoid congestion on the Bitcoin network when the demand for on-chain transactions is so high. 

But it is not only on-chain transactions that exist. In fact, a solution was developed for Bitcoin some time ago that allows virtually instantaneous and always extremely cheap transactions with no real capacity limits. 

This solution is the Layer-2 Lightning Network (LN), which does not require all transactions to be recorded on the blockchain. 

LN works by opening special channels that are opened by special wallets. The channels make only two registrations on the blockchain in total, one at opening and one at closing.

None of the transactions that occur within the channel after it opens and before it closes are recorded on the blockchain. This is why they are called off-chain transactions. 

In fact, transactions on LN are not validated by the miners because the miners only validate the opening and closing of the channel. 

The validation of transactions on LN takes place directly between the sender, the receiver and the LN node. There are many LN nodes, more than 18,000, and anyone who wants to can open one. 

Since there is no real limit to the number of LN nodes that exist, there is also no real limit to the number of BTC transactions that can be processed daily in this way, unlike on-chain transactions. 

Moreover, the cost of LN transactions does not depend on the miners, as it does for on-chain transactions, but on the nodes, which in effect compete with each other to offer lower rates.

With so many nodes, the competition between them means that they have to offer very low fees to attract users.

LN and exchanges like Binance

With this in mind, it is hard to understand why there are still crypto exchanges that have not activated their own LN node. 

To be fair, there are some that have been active for years, such as Bitfinex, but many of the major exchanges have not done so until now. 

The final version of the Lightning Network protocol was released in 2019, the same year it was adopted by Coinbase. 

Binance, on the other hand, has so far preferred not to adopt it. 

The reason for this curious decision was most likely due to low usage.

On the other hand, by July 2021, the median daily fee per bitcoin transaction had fallen below $2 and was often well below $1. 

Although fees on LN are much lower, the problem for Binance only recently exploded when the median fee jumped above $10. 

Strengths of the Lightning Network

The main strength of using the Lightning Network instead of traditional on-chain transactions is the lower transaction cost.

Not only do LN fees rarely exceed $1 per transaction, they are often negligible, in the order of a thousandth or at most a hundredth of a dollar. 

Of course, the fees are always paid in BTC, but with such low fees, even very small transactions in Bitcoin make sense. 

The second strength, linked to the first, is microtransactions. 

There is no point in doing transactions of a few Satoshi if the cost to the miner of sending them is $1 or more. Instead, with fees of a few thousandths of a dollar, even transactions of a few cents can make sense. 

In particular, those who wanted to send, for example, $50 in Bitcoin (0.00179 BTC, or 179,000 SATS) yesterday would have had to pay an additional fee of 22% of the amount, effectively robbing themselves of 218,000 SATS to have 179,000 delivered. 

On the other hand, it costs about 4 SATS to have 179,000 SATS delivered via LN. 

So LN is preferable for Bitcoin transactions of a few BTC or SATS (one Satoshi is one hundred millionth of a Bitcoin). 

The other advantage is that you don’t have to wait at least 10 minutes for a miner to enter the transaction into a blockchain and validate it, because transactions via LN are almost instantaneous.

The disadvantages of LN

The main disadvantage is that you have to use special wallets. 

Therefore, you cannot send BTC via LN using traditional wallets. 

In order to perform a transaction via LN, you must first open a channel, pay the on-chain transaction fees required to open it, and then deposit the BTC you wish to use via LN into the channel. 

It should be noted that not all traditional wallets support LN channels yet.

The other drawback is that the recipient must also have an LN channel, as you can only send from one LN channel to another. 

Finally, transactions made on the LN network are not recorded on-chain.

While this is an advantage because it avoids paying high fees, it is a disadvantage because there is no public proof that the transaction took place. 

However, both sender and receiver have private proof of the transaction. 

In the future, it is possible that the vast majority of BTC micro-transactions will take place via LN, with only those of high value remaining on-chain.