Slow confirmation times and transaction fees that are growing along with the adoption are plaguing Bitcoin network. Improving said issues on the main layer proved to be difficult due to various roadblocks. Developing second layer solutions seems like the logical step towards solving those problems. But how viable are those solutions and are there better options available? This article assesses some of the available scaling solutions that enable micropayments and provide extremely fast finality. Initially, we only wanted to compare Nyzo vs Nano but decided to add Lightning Network to this interesting mix. Read on to find out who is winning the scalability battle.

Lightning Network

Lightning Network (LN) is a second layer solution that aims to solve Bitcoin scalability struggles. Transactions are settled off-chain between two or more peers. It is a much better alternative when compared to the big block size increase. It scales transaction throughput by several orders of magnitude without significantly increasing the size of Bitcoin ledger and thus endangering its decentralization. Lightning Network has been in development ever since the original whitepaper has been published in early 2016. The first mainnet beta was released in March 2018 by Lightning Labs – one of the main companies developing LN. It is still in beta state and using it for larger amounts isn’t advisable.

There are multiple Lightning Network implementations developed by various firms. But each of them closely follows BOLTs (Basics of Lightning Technology) – a set of predefined rules which ensure interoperability between various Lightning Network implementations.

Lightning Network capacity is on a steady rise and currently has over 1000 BTC’s locked inside various payment channels. Graphical representation of Lightning Network including capacity and number of nodes/channels can be seen here. Additional statistics can be seen on 1ML.

How Lightning Network Works

Only the action of opening and closing Lightning channels is recorded on the Bitcoin blockchain. All operations in between are not. Channel is created by publishing funding transaction on the blockchain which essentially locks the designated coins in the channel. While the bidirectional channel is open, users can transact as much as they want and the channel can stay open indefinitely. The coins are unlocked when the last transaction is completed and published on the blockchain. That also finalizes all payments and closes the channel.

How To Pay Someone Using Lightning network

Firstly scan the payment request (contains a hash, amount, destination and expiry) that receiving party generates, then compute the route to the destination and finally send it over the network. Users can transact even if they don’t have a direct channel open between themselves – transactions can be routed through multiple hops.

The requirement for the above process is that you already went through the Lightning node setup and successfully opened your payment channel. Which at the moment isn’t easy enough and requires some effort. One demonstration can be seen here. There are other ways, but they require some form of custody. Here is a good list of LN wallets and their requirements.

Downsides

Payments are stateful; you can lose your BTC if you or your end node go offline at any moment. DDoS attacks could pose an additional problem and make the task of keeping your nodes online that much difficult. And you can’t restore your funds from mnemonic seed. You need the latest channel state. More info is provided here. This can be remedied by deploying Watchtowers, but they incur additional fees.

The funds you put in the channel are locked up for the specified duration. You need to pay standard Bitcoin network fees to open and close the channel. So the payments aren’t instant or feeless, you still need to wait for your transaction to confirm on the main Bitcoin layer. But once the channel is open, the transactions can go as fast as the data can flow between the transacting peers.

Another issue that recently gained publicity due to popular Lightning Torch is connected to liquidity issues. To receive payment through Lightning Network, you need to have enough “incoming liquidity”. Basically, to receive 1 BTC you need to have an open channel with the equivalent amount. More info can be found in this article.

One thing that can be seen as a downside and upside at the same time is that all transactions made on LN are not recorded on the blockchain. Only the final transaction amounts are written. This increases privacy as transactions made through multiple channels and hops end up being mixed, and their tracks are lost. But at the same time, it decreases Bitcoin transparency everyone is used to. It is a bit of a double-edged sword.

Generally, the full setup of the Lightning Network is complicated and not user-friendly. It can be remedied by using something like Wallet of Satoshi, but it isn’t even a wallet, more like a custodial bank account. You don’t own the private keys or have control over any underlying LN features. Not really a viable alternative for what we are looking at here. If you go that route, you can just as well continue to use PayPal.

Nano

Nano was created by Colin LeMahieu who worked on it for about a year and a half before releasing it to the public in 2015. It was known as RaiBlocks back then. Nano didn’t have ICO or initial mining period. All coins were distributed through faucets. Interested parties were rewarded with free Nano for solving CAPTCHAs. The former encouraged fair and wide distribution of coins and allowed everyone to get their share. Distribution ended in late 2017 with the total amount of 133,248,290 NANO which is also the MAX/TOTAL supply of NANO. Developers have a public account which contains developer funds that can be explored here. It currently holds 3,657,050 NANO which represents about 2.74% of total supply. This year they have already spent/transferred around 623,000 NANO. When the fund is run out, NANO will rely solely on community donations which could be challenging. In the worst case scenario and given the passion he demonstrated, the founder might be willing to fund the project from his NANO balances. But keeping expenses under control through careful planning should allow the remaining funds to last long enough.

Nano Features

Let’s explore what makes Nano interesting or even superior alternative to Lightning Network. Nano key selling points are as follows:

Fast – transaction settlement or finality usually occurs in less than two seconds . No joke, you can quickly test and see the nano transaction in action here.

. No joke, you can quickly test and see the nano transaction in action here. Fee-less – there are no fees , all transaction are completely free.

, all transaction are completely free. Environmental friendly – Nano aims to remain green and provide a much lower impact on the environment when compared to Bitcoin or especially the traditional banking system. Some statistics can be found here.

How Nano Works

Nano uses asynchronous “Block-Lattice” infrastructure which enables high scalability on the protocol level. “Block-Lattice” is a variation of directed acyclic graph (DAG) data structure formed by individual accounts. Each account has its own blockchain. Every transaction consists of a send and receives blocks. Block size is about 400 bytes. Each party computes and signs their block on their machine after which they relay it through the network. That’s the tiny POW part that Nano incorporated. A fixed amount of POW for all blocks is used as an alternative solution for combating spam in a feeless network. Since the POW calculation is based on the hash of the previous block, it can be calculated in advance and enable virtually instant transactions.

Parties do not have to be online at the same time. Receiving party can publish receive block at their convenience. Until the receiving party comes online, the transaction will remain pending, but that doesn’t mean that the transaction is unconfirmed. The sender is unable to reverse it after signing and completing the send block. It remains in the pending balance until the receiver creates and signs receive block. Then he can spend/use the funds.

Nano Consensus

Nano consensus mechanism is similar to the delegated proof of stake (dPOS) system. One NANO equals one vote. Account holders (Nano users) choose the representative they prefer to vote on their behalf with their voting power. Representatives are just Nano nodes that have high uptime and are (always) ready to vote. They can be swapped at any time, at the user’s will. But what is the role of representatives? Well, they vote for various network related things. When the fork happens, the network with the most votes is regarded as the valid one. The same applies to any other required global network decision. Also, transaction (block) is confirmed when it has more than 50% of voting weight. The more decentralized the voting power, the more resilient is the Nano network.

Nano Node Economy

Nano nodes do not require many resources; the node can be run without issues on a good $10 VPS. Running a node is important; nodes contain full historical ledger, make the network more resistant and allow other upcoming nodes to sync faster. To successfully pull off 51% attack on Nano network, the attacker would need to own 51% of total NANO supply. This makes it difficult and more expensive to pull off than traditional 51% attacks on cryptocurrencies using standard POW blockchains.

The incentives for running a node are kinda murky, but the key incentive should be that by running a node and using the NANO for your business saves you money when compared to Bitcoin or other alternatives since there are no fees. In other words, using Nano for business purposes will reduce operating costs. Lack of other incentives doesn’t encourage regular users to run their own nodes. But even if they do, their nodes don’t hold much weight. Representatives of major exchanges and wallet providers will always hold the most voting power. Hence we don’t see how can NANO voting power ever be truly decentralized. Here you can see the breakdown of voting weight that various representatives possess.

Nyzo

We have already written an extensive review of Nyzo and all of its characteristics. Check it out before you proceed any further. The key takeaway is that Nyzo achieves speed and scalability on a protocol level with the help of novel democratic consensus mechanism. Each node has equal voting power, one node = one vote. All further details are laid out in the article linked above. Keep in mind that Nyzo is still very new and all of the required tools for growing user adoption are yet to be built. Ultimately, only time can tell who will win this Nyzo vs Nano vs Lightning Network competition.

Side By Side Comparison

The main TPS comparison between the three candidates is not appropriate since Lightning Network doesn’t have the same limitations as other candidates. Basically LN can handle as many transactions as needed since all transactions are p2p, the speed mainly depends on processing power and network latency. But also on the transaction route. Direct channels provider higher TPS than transactions done over several channel hops. But in both cases, it is so high that measuring it doesn’t make much sense even if the reliable test could be done. Lightning Network faces different limitations that include channel capacity and the amount of on-chain transactions required for sufficient operation. Ideally, everyone would open their channel and keep their BTC inside it indefinitely, but that is not viable due to serious security implications.

On the other hand, Nyzo vs Nano is a more direct and straightforward comparison. Without further ado check out the table below to see the results. Some approximations had to be made due to lack of exact numbers, but we believe it provides a good overview of the capacity each of these vastly different technologies provides.

There you have it, at the moment Nano seems like the best option available. The technology is ready; security audits have been passed, infrastructure is there. We are not sure why more businesses aren’t using and accepting Nano for their payments. The situation should drastically improve when Nano foundation starts to put more efforts towards marketing.

The Lightning Network has a lot more work left to do before it can be applied in the real world. Nyzo, on the other hand, is a new contender that is progressing nicely and has lots of potential but needs to prove itself before it can be taken seriously.

Conclusion

Each of the discussed scaling solutions has their strengths and weaknesses. The ideal solution depends but is not limited to your use case, personal preferences, security requirements, etc. In reality, it is great that we have many options to choose from. Maybe the best course of action would be not to look at them as competitors but rather as players building and expanding the ever-evolving crypto ecosystem.

One thing is clear; Bitcoin is slowly proving to be an excellent store of value (SoV). Even in this rough bear market times if you focus on the big picture. SoV appears to be its natural utility, and we are not sure forcing it to become something else through scaling solutions that will always require lots of compromises is the best way forward. On the other hand, innovation and experimentation are always welcome. We are looking forward to pushing these remarkable technologies to their limits.

If you are looking for a reliable provider to host your nodes for any of the discussed networks, take a look at our hosting crypto nodes article where we review best VPS providers. With that covered, we can conclude the Nyzo vs Nano vs Lightning Network comparison.

MyAltcoins team,

Petar & Ana