Bitcoin’s Lightning Network has become the digital currency’s main response to those who say fees for on-chain transactions have gone far too high over the past couple of years. The transaction caching system has been hyped by some as a saviour for those who wish to make small-value payments on the Bitcoin network, and others say there won’t be a reason to use on-chain payments ever again.
Of course, these people are wrong — at least on that second point. As Blockstream Core Tech Engineer Christian Decker recently explained at Chaincode Labs’s Lightning Apps Residency, Lightning payments and on-chain transactions are for different use cases. Additionally, there will even be situations where Lightning payments are more expensive than on-chain transactions.
Lightning is Not a Replacement for On-chain Payments
Early in his talk, Decker explained that the Lightning Network is not intended to be a replacement for traditional, on-chain bitcoin transactions.
“Lightning by no means is a complete replacement for bitcoin on-chain payments,” said Decker. “There are different levels at which on-chain payments become much, much better than off-chain payments. You have to be aware of these tradeoffs, and you should choose the right tool for the right job.”
Different Ways of Calculating Transaction Fees
While on-chain bitcoin transaction fees are related to the amount of descriptive information associated with the transaction that must be placed into the public blockchain forever, fees for Lightning payments are proportional to the amount being sent, in addition to a base fee for the act of forwarding payments.
“I have to do some cryptographic operations to forward your [Lightning] payment, so I will ask you to pay, [for example], one satoshi for each forwarding payment,” explained Decker. “And we also have proportional fees, which basically mean, ‘Hey, I had to put up such and such liquidity to forward your payment, [so] please pay me accordingly to what I just transferred.”
Lightning Will Sometimes Be More Expensive
Due to the different ways in which the fees associated with on-chain transactions and lightning payments are calculated, users will have to choose the correct type of payment method for different scenarios — or more probably, developers will do this for them in the backend.
“There’s a natural cutoff point that will automatically emerge where the proportional fees are just higher than on-chain fees for really large payments,” said Decker.
While on-chain transactions will be processed at slower speeds than what is available on the Lightning Network, Decker noted that this is not much of an issue because large transactions are usually slow no matter what payment method is used. For example, someone buying a new Lamborghini is usually not in a rush and has some paperwork to fill out before they can drive home in their new toy.