Lightning Network vs Visa. The key role being played by OmniBOLT in this confrontation
Bitcoin (BTC) has changed the world as a decentralized, non-state form of currency that can facilitate peer-to-peer (P2P) transactions across national borders.
But despite this functionality, Bitcoin’s role as a payment mechanism has been questioned due to low transaction throughput. Bitcoin’s blockchain can process up to seven transactions per second, and high demand on the network has led to the average transaction fee on the network reaching record highs above $62 in certain periods.
To solve the problem of low bandwidth and high transaction fees, developers created the Lightning Network, a Layer 2 scalability solution that enables off-chain transactions.
Lightning Network creates a P2P payment channel between two parties to a transaction. The medium allows them to send an unlimited number of transactions, which becomes almost instantaneous and inexpensive. The protocol acts like a small ledger with which users can pay for small goods and services, such as coffee, without affecting the Bitcoin network. Users on the network block a certain amount of bitcoins to create a channel. Once the BTC is blocked, recipients can bill amounts as needed.
In this article, we will review each system's main pros and cons, as well as tell you what opportunities this confrontation for the Lightning network OmniBOLT provides.
Financial risk
Let’s dive into the financial aspects of card networks and Lightning, what’s common and what is different.
Liquidity and solvency are key aspects.
Card networks are settling transactions on a net basis. The network is aggregating all the transactions during a period window, for instance, 24 hours (the period is extended for weekends), and then calculates how much each member bank owes or is owed to or from one another.
But to facilitate payments and accounting, card networks act as intermediaries so that the banks that owe money send it to the card network’s bank, and banks that are owed money receive it from the card network’s bank.
Let’s dive into the implication of this. As Visa takes on counterparty risk related to the members of their network, they want to make sure that those members are well-financed. But as Visa operates in 160+ countries, what’s the best way to do it? Partner with banks! Banks are some of the most regulated entities in the world, and relying on the banking system allows Visa and other card networks to scale in the number of countries they operate while providing them with the assurance that their members will continue to be solvent.
There are a lot of other financial risks in card networks, but one that is worth mentioning is credit risk. This risk is not borne by the card network, but by the issuer.
Lightning is very different in that regard because, for the first time in history, payments can be made instantly, without any counterparty risk, across the world.
So there are no such things as counterparty risk, but instead, Lightning is susceptible to technology risk. A software bug could result in a loss of funds as a result of a hack, or a bug could simply make money unspendable. However since Lightning is open source, there is a good reason to believe that, over time, this risk will be drastically reduced.
Liquidity
For Lightning, liquidity is probably the biggest hurdle that must be overcome before it can really take off.
The issue is the following: to be able to pay, a customer needs to have outbound liquidity. To receive a payment, a merchant needs inbound liquidity. Every channel has a defined sum of money in it, split between inbound and outbound liquidity.
At a high level the issue is that:
Funds must be locked.
If a merchant only receives payments, or a customer only sends payments, then at some point the channel will be “exhausted” and additional payments won’t be possible until channels are rebalanced.
Fraud
If liquidity is Lightning’s Achilles heel, fraud is the card networks’ weak point. Not only does fraud prevention cost a huge amount of money, but fraud itself costs “$100 billion,” according to the Nilson Report. That’s about 0.07% of card transactions.
The reason this fraud exists is because of the many flows of the card network. Most of this fraud occurs with either online transactions or magnetic stripe transactions, none of which are protected by EVM cryptographic components and are therefore easily counterfeited.
I believe that with Lightning (unprotected), as long as the cryptography is unbroken, fraud will be virtually non-existent. Is this an unfair advantage?
Fees
The fee market is an interesting one. For Lightning, fees are a free market. Any node can set its own fee level per channel, so it’s expected that the fees will become competitive.
There is no doubt that card networks have done a tremendous job of facilitating payments, but the fee structure creates a conflict of interest regarding the interchange between issuing banks and merchants.
A simple fee structure, that doesn’t put pressure on merchants, is definitely an opportunity for Lightning.
Transaction throughput
Visa can process up to 24,000 transactions per second. In a recent interview, Visa CFO Vasanth Prabhu said that the network could theoretically process up to 65,000 transactions per second.
However, the Lightning Network goes much further, processing up to 1 million transactions per second, making it the most efficient payment system in the world in terms of transaction throughput.
While the benefits of Lightning Network in terms of transaction throughput are now clear, it also has notable drawbacks.
First, opening a Lightning wallet and funding it may not be as easy or as familiar as opening a bank account and using a debit card.
Adoption and usage scenarios. OmniBOLT solution as a key stage of development.
While one could argue that the potential use of Lightning today is still speculative, given the fact that there are very, very few merchant locations accepting Lightning today, compared to the 46 million merchant locations accepting the 3.3 billion cards issued by Visa alone.
The reason Lightning can gain momentum quickly and exponentially is because it is open source and completely software-based. Every smartphone can become a point of sale or payment device simply by installing a mobile app. This compares favorably to cards, which still rely mostly on hardware. Even Google Pay or Apple Pay payments depend on an NFC receiver, which requires costly upgrades to point-of-sale systems.
OmniBOLT extends the capabilities of the Lightning Network.
OmniBOLT is a protocol built on the Bitcoin and OmniLayer networks that allows transactions with native OmniLayer crypto-assets using the Lightning network. The OmniBOLT channel allows instant transactions of crypto-assets issued on top of OmniLayer.
The Lightning Network offers superior functionality for cost-effective and efficient Bitcoin transactions (it provides fast and inexpensive Bitcoin transactions, but the technology is limited to this single feature). OmniBolt takes the possible LN to a new stage of development and its capabilities, allowing decentralized financial applications to work on top of the Bitcoin network.
OmniBOLT itself does not issue cryptocurrency tokens. It is an architecture that allows more than 700 OmniLayer-based assets to be exchanged through the Lightning Network.
OmniBOLT expands infinitely the acceptance and use of the Lightning Network by expanding the number of assets that can be sent through the network.
The implementation of this technology greatly extends the functionality of the Lightning network.
Conclusion
Card networks like Visa are very advanced, and from a consumer perspective, they work very well.
But behind the seeming ease of card spending are still inefficiencies and costs that run into the hundreds of billions of dollars a year. These costs are ultimately paid by the consumer.
Like Bitcoin, Lightning gives a significant amount of control back to individuals. But with great power comes great responsibility. Users can lose money if they don’t manage their keys properly. And for billions of people to manage their keys with confidence requires a lot of learning.
Nevertheless, the potential benefits of Lightning are enormous and we are on the cusp of a big change.
About OmniBOLT
OmniBOLT(Basis of Lightning Technology) is the world’s first stablecoin (on Omnilayer) circulation specification for Lightning Network, and the second important protocol presented by Omni foundation. It is a big extension of BOLT, the major parts of this spec are p-2-p instant payment and mortgage loans for crypto-assets.
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