XRP, managed by the XRPL Foundation, is one of many cryptocurrencies that claim to have a higher transaction throughput than Bitcoin. Enabling cheaper and faster transactions has been a major selling point for thousands of cryptocurrencies launched each year. This hype has been so strong that some people even consider Bitcoin to be an "outdated" technology.
In fact, the opposite is true. To understand this, we need to discuss the famous trilemma of blockchain and subsequently the Lightning Network.
The trilemma refers to the fact that maximizing the three key aspects of blockchain technology—security, decentralization, and transaction throughput—is impossible at the same time. In short, optimizing one aspect often comes at the expense of others.
Bitcoin prioritizes decentralization, with a relatively low throughput of 7 transactions per second. In contrast, XRP's throughput is 1,500 transactions per second.
The degree of decentralization can be measured by the number of nodes, which is directly proportional to the size of the blockchain (currently 630GB), and as the blockchain grows, the cost of setting up a node (hard drive, memory, bandwidth, etc.) also increases.
Ensuring the network remains decentralized requires small block sizes, limiting the number of transactions they can contain. The 1MB limit per block is a cornerstone of this design.
This limit was fiercely defended during the 'block size wars.' At that time (2017), some wanted to sacrifice decentralization to increase transaction throughput, but they did not succeed. This resistance led to the fork of Bitcoin Cash (BCH).
The obvious failure of Bitcoin Cash indicates that Bitcoin's main appeal lies in being a truly decentralized and secure store of value, rather than a means of payment. However, the creation of the Lightning Network allows us to have both.
Paying for coffee with Bitcoin. The Lightning Network greatly increases the transaction throughput of Bitcoin while maintaining its security. It is a secondary network connected to the Bitcoin network via so-called Hash Time-Locked Contracts (HTLCs).
Transactions here are faster, cheaper, and more private. The Lightning Network is particularly suited for small payments, which can be as low as one satoshi (i.e., 0.00000001 BTC or €0.001). For example, it can be used to give tiny online tips or pay for a few seconds of internet service (like streaming) without a subscription.
Once BTC is locked in a channel through an on-chain transaction, payments can be made in real-time and nearly for free. Theoretically, the Lightning Network can handle millions of transactions per second. Fees are much lower than on-chain transactions and can spike during network congestion. Fees are calculated in millisatoshis, which is one-thousandth of a satoshi.
But isn’t a satoshi the smallest unit? Indeed, but the Lightning Network uses smaller units. When a channel is closed via a second on-chain transaction, the amount is rounded down to the next lower satoshi.
Like the Bitcoin network, the Lightning Network routes payments through a decentralized network of nodes. Routing is dynamic, ensuring the selection of the cheapest paths to deliver payments to various corners of the internet.
A slow but steady growing network. Since its launch in 2018, the Lightning Network has experienced exponential growth, although it seems to have slowed down in the past two years. As of the end of 2024, the network hosts about 15,000 nodes. There are around 50,000 active channels, with a total capacity of 5,000 BTC, equivalent to approximately $500 million.
The Lightning Network is an open-source project with multiple interoperable implementations, such as LND, Core Lightning, or Eclair. They coordinate their work through a set of standards described in BOLT (the Lightning Network specifications), which share the same philosophy as the Bitcoin network.
The most popular Lightning wallets include Phoenix and Breez from France. Several exchanges, such as Bitfinex, OKX, Binance, or Kraken, have integrated the Lightning Network, allowing customers to deposit and withdraw BTC through Lightning channels and avoid high fees during network congestion.
Merchant adoption of the Lightning Network is continuing to grow. For instance, Bitrefill, a major Bitcoin gift card retailer. There is also OpenNode, a payment processor enabling over 500,000 merchants (such as Shopify) to accept Lightning payments.
One last point, Lightning transactions are very private. They reach their destination through many channels, making them inherently private. This is a significant difference from the Bitcoin network, where all transactions are public.
Lightning payments only disclose the sender and receiver to directly related parties. Therefore, rather than doing a Coinjoin, it is better to conduct multiple transactions on the Lightning Network to obscure traces.
In other words, the Lightning Network makes it unnecessary for cryptocurrencies that rely on high transaction throughput or focus on privacy like Monero (XMR) to distinguish themselves. Notably, Finnish police have been able to trace Monero transactions. In summary, the Lightning Network has eliminated the rationale for thousands of cryptocurrencies that exist solely to enrich their creators. For example, the creator of XRP allocated all XRP to himself and gradually sold it to speculative investors.