Bitcoin’s (BTC) Lightning Network “Impractical Even For Highly Technical Users”

  •  Bitcoin’s (BTC) second-layer payment solution has many glitches, and has a very high rate of transaction failure, according to CEO Andreas Brekken.
  • Brekken also said that LN is “impractical to use even for highly technical users” because of many software bugs.

Bitcoin (BTC) may be the most dominant cryptocurrency, but its network has been experiencing scalability issues. Block confirmation times on the Bitcoin network - how long it takes to process a set of transactions - has increased significantly.

The main reason why BTC transactions generally take much longer to process now is because the Bitcoin blockchain has become too congested.

Due primarily to the rising interest in cryptocurrencies that was seen in late 2017, far more people are trading and investing in bitcoin (BTC) and ether (ETH) - which has also experienced severe scalability problems.

Lightning Labs’ Lightning Network

In order to better handle the increased workload on the Bitcoin network, a number of solutions have been proposed. One of the more widely adopted ones is called the Lightning Network, which is a second-layer payment network designed to work alongside the main Bitcoin blockchain.

There are several different implementations of the Lightning Network (LN), however, most of them aim to achieve the same thing: to make the Bitcoin network more efficient.

In the past 8 months, BTC transactions have been reported to take hours, and in some cases even days or weeks to confirm.

Some users have also reported paying up to $100 in transaction fees. Clearly, these are significant problems if the cryptocurrency seeks to gain traction. LN solutions attempt to help the Bitcoin blockchain process transactions more quickly, while reducing transaction fees.

An LN solution introduced in March by California-based Lightning Labs has reportedly been more widely adopted than other implementations of the Lightning protocol. Lightning Labs’ LN software has also been tested extensively, but it’s still in its beta stages and still requires considerable work.

Lightning Network Has Grown By 85%?

Recently, however, it was reported that LN adoption rates have increased significantly. These reports are mainly based on the sizeable increase in the total stake amount on the LN, which has increased from 4 BTC, when its network was first launched, to 100 BTC.  

This is signifiicant rise indicates that people are gradually coming on board with the solution.

Full-node operators, or block validators, have to stake some of their bitcoins on the LN network in order to be able to verify transactions.   There are currently around 3000 nodes that are supporting the Lightning Labs’ LN.

But do these seemingly impressive numbers point to real growth and adoption of the LN? Has this second-layer payment solution really made BTC transactions quicker to settle and more cost-effective?

Very Few Transactions On Lightning Network

At present, very few BTC transactions are being routed through the LN network, which could simply be because it was launched fairly recently. Bitcoin users may not feel confident in using it just yet.

Because of the currently low number of transactions on the LN, the amount of digital currency that can be earned by its block validators is a lot less than what they have to pay in electricity costs to maintain a full-node.

Andreas Brekken, owner of cryptocurrency review website, recently experimented with Lightning Labs’ LN by staking 35 BTC on the network. Brekken’s relatively large stake amount effectively gave him 49 percent control over the LN.

The CEO soon learned that it was not too difficult to configure an LN node, but he also found the LN network to not be very effective in processing BTC transactions. Brekken reported that he had attempted to send 2,020 satoshis (0.0000202 btc), or only $13 at the time of writing, but he ran into some issues.

The crypto enthusiast explained during his “Lightning Network For Goods and Services” series that he had gotten an error message for the simple BTC transaction he was trying process. Brekken noted:

I click the button a few more times — The error remains the same — I look in the Google Chrome network inspector and SatoshiTweet is returning a generic 500 Internal Server Error response.

“Impractical Even For Highly Technical Users”

Brekken then tried to play “Lightning Spin”, which is a game created for the Lightning Labs’ LN network. This also led to some problems, as the CEO said there were several glitches in the game, and he had to keep on reloading his browser just to be able to play it.

Brekken attempted to use the LN network to pay for different services as well. Although there are a few online shops that do support the second-layer payment solution, the crypto entrepreneur said he received many errors messages when trying to actually pay the merchants.

Brekken described his experience with the LN so far, explaining that:

Sending payments using the Lightning Network is cheaper than the regular Bitcoin network, but suffers from routing errors and wallet bugs that make it impractical even for highly technical users.

In late June, a crypto newsletter service called Diar reported that “the success rate for a payment for no more than a few dollars between random LN nodes is 70%.” Diar also said that there was a 99% rate of failure for large BTC transactions.

Notably, Cornell professor Emin Gün Sirer confirmed in June that despite the the number of payment channels increasing by 10-fold since LN was launched, there was still a very high failure rate for most BTC transactions on the LN.

Looking at these reports suggests that crypto enthusiasts should be more concerned about Bitcoin’s (BTC) current scalability problems, instead of worrying about whether the SEC will allow Bitcoin ETFs.

U.S. SEC Needs More Time to Consider VanEck Bitcoin ETF Proposal, Invites Comments

The U.S. Securities and Exchange Commission (SEC) announced on Monday (May 20) that it needed more time to consider the VanEck–SolidX Bitcoin ETF proposal. This delay also gives interested parties more time to comment on the proposal and address the SEC's main concerns. 

On 30 January 2019, Cboe BZX Exchange ("BZX") filed with the SEC a proposed rule change to list/trade shares of "SolidX Bitcoin Shares", which would be issued by the VanEck SolidX Bitcoin Trust. This proposed rule change was published in the Federal Register on 20 February 2019. It then had 45 days to approve, disapprove, or ask for a delay.

(Note, however, that BZX had filed its original proposal back in June 2018; the SEC delayed a decision on this proposal several times, and February 27 was the final deadline for the SEC to make a decision. However, due to the U.S. government shutdown that occurred in December 2018 and ended in January 2019, the SEC was partially out of action during this period. By the time that the SEC fully operational again, there was only a few weeks left till the final deadline. So, to give this Bitcoin ETF proposal the best chance of success, on 22 January 2019, BZX withdrew its original proposal, and re-applied (in order to reset the clock) on 30 January 2019.)

Anyway, on 29 March 2019, the SEC released a notice to say that it had selected 21 May 2019 as the date by which it should approve, disapprove, or ask for a further delay to consider the grounds for disapproving the Bitcoin ETF proposal. Why 21 May 2019? Because 90 days is the maximum amount of time it could ask for, and 21 May 2019 is 90 days from 20 February 2019, which was the date that the proposal got published in the Federal Register.  

Well, yesterday (i.e. just one day before the expiry of the 90-day deadline), the SEC decided to delay making a decision, and this time it had to provide "notice of the grounds for disapproval under consideration" (i.e. explain why it thinks that it might deny the proposal).

Here are a few of the SEC's concerns, and it is inviting the ETF's sponsor, i.e. BZX, and other interested parties to provide written comments (in either electronic or paper form):

  • Has BZX "entered into a surveillance-sharing agreement with a regulated market of significant size related to bitcoin?"
  • What is the relationship between the Bitcoin futures market and the Bitcoin spot market?
  • The proposed Bitcoin ETF uses "a non-public, proprietary index to value holdings based on OTC activity", but is this really "an appropriate means to calculate the NAV of an exchange-traded product"?
  • BZX has said in its proposal that it "has entered into a comprehensive surveillance sharing agreement with the Gemini Exchange and is working to establish similar agreements with other bitcoin venues." But is the Gemini digital asset exchange "a regulated market of significant size"?

Any arguments regarding whether the proposal should be approved or disapproved need to be submitted within 21 days of publication in the Federal Register of yesterday's order (Release No. 34-85896; File No. SR-CboeBZX-2019-004), and anyone who wants to "file a rebuttal to any other person’s submission" must do so no later than within 35 days of the date of publication in the Federal Register.

The following tweets were sent out on May 19, i.e. the day before the SEC made this latest announcement, by Crypto Twitter's favorite U.S. attorney, Jake Chervinsky:

According to Chervinsky, "VanEck's new deadline is August 19," and the "SEC can & likely will delay one more time for a final deadline of October 18."

This is how Gabor Gurbacs, Director of Digital Assets Strategy at VanEck/MVIS, expressed his personal thoughts on the SEC's ultra cautious attitude towards Bitcoin ETFs:

The SEC choosing to delay making a decision on the VanEck Bitcoin ETF proposal did not come as a surprise to the crypto markets, which reacted very calmly (Bitcoin's price only went down slightly), and in fact, at press time (11:00 UTC on May 21), according to data from CryptoCompare, Bitcoin is trading at $7,945, up 0.33% in the past 24-hour period:

BTC - 24 Hour CC Chart - 21 May 2019.png