Why The Bitcoin Lightning Network Doesn’t Work

So I guess I should start this off with a disclaimer: I actually love the Lightning Network. It’s one of my favorite parts of the Bitcoin protocol stack and I’ve followed it pretty closely for years. If Lightning didn’t exist, I would still own Bitcoin, but I would be much less optimistic about its potential future. I don’t see many real alternatives to scaling that don’t involve custodians, trust and the erosion of the properties of self-sovereignty for most people on the poorer end of the wealth spectrum.

At a high level a Lightning channel is just this simple:

  • Two people lock up money in a 2-of-2 multisig address.
  • Both parties arrange a pre-signed transaction that would give each of them their money back before funding.
  • To update the balance, both parties sign a new transaction with the updated balance and exchange “penalty keys” to let the other party take all the money in the multisig address if someone tries to use an old pre-signed transaction.

But the Lightning Network is way more than just a few direct connections between two parties. These single channels can be chained together with other single channels to form a vast interconnected payment network. It’s a very flexible system that enables payments between otherwise unconnected parties. That being said, there are many downsides and limitations I see that are not really widely acknowledged or talked about outside of developer groups and more technical users.