If you’ve been exploring the world of bitcoin, you might have heard about on-chain payments and lightning payments.
These are just two different ways of moving bitcoin around but it’s helpful to understand their differences, advantages, and disadvantages.
1. What’s the difference between on-chain and lightning payments?
On-chain payments are the original form of bitcoin transactions. They use the Main Bitcoin Network for processing and all transactions are recorded on the public blockchain. On-chain payments can take several minutes or hours to complete and they incur processing fees from the “bitcoin miners” that validate the transactions.
Lightning payments are a newer form of bitcoin transactions. They use the Lightning Network to process transactions using bidirectional payment channels. Lighting payments are completed almost instantly and have very low processing fees (usually less than a few cents).
Both payments technologies are just different ways of transferring the same bitcoin. You simply decide whether you want to send (or receive) bitcoin as an on-chain payment or a lightning payment.
2. How do on-chain payments work?
You can make an on-chain payment using a bitcoin wallet. This usually involves entering a bitcoin wallet address and a payment amount. Your wallet then broadcasts the transaction to the Main Bitcoin Network for processing.
On-chain transactions are processed by “miners” who use powerful computers to validate the payment. For example, they make sure that the sender has the authority to transfer the bitcoin and that it hasn’t already been sent to someone else. The validation process involves solving complex cryptographic puzzles before adding the transaction to the public blockchain.
“Bitcoin miners” receive fees as a reward for processing the transfer. These transaction fees vary depending on how many on-chain transactions are being processed at any given time.
3. How do lightning payments work?
You can make a lightning payment using a bitcoin wallet. This usually involves scanning a lightning QR code and entering a payment amount. Your wallet then broadcasts the transaction to the Bitcoin Lightning Network for processing.
Lightning transactions are not processed by “miners” and they’re not recorded on the public blockchain. Instead, lightning transactions are processed through a network of bidirectional payment channels. These payment channels allow people to transfer bitcoin almost instantly and with minimal fees.
4. What are the advantages of on-chain payments?
Transparency. On-chain payments are recorded on the public blockchain, which makes them fully transparent. However, blockchain transactions are still private as they don’t include personal information.
5. What are the disadvantages of on-chain payments?
High processing fees. On-chain payments are processed by “miners” using powerful computers to solve cryptographic puzzles. These “miners” receive fees as a reward for validating transactions and recording them on the blockchain. Depending on network processing volumes, fees can cost as much as $30 per transaction.
Slow processing times. On-chain payments take time to be validated and recorded on the blockchain. Depending on network processing volumes, on-chain transactions can take minutes, hours, or even days to complete.
6. What are the advantages of lightning payments?
Fast processing times. Lightning payments are completed almost instantly, making them ideal for everyday payments such as buying coffee or groceries.
Low processing fees. Lightning payments have very low processing fees (usually less than a few cents), making them ideal for both small and large payments.
7. What are the disadvantages of lightning payments?
Requires a compatible bitcoin wallet. Lightning payments require a compatible bitcoin wallet. However, there are already many wallet apps today that support lightning payments (including Wallet of Satoshi, Muun, and Breez), with more being launched during 2024.
Payments are not recorded on the public blockchain. Lightning payments are not recorded on the public blockchain, which can be a disadvantage for some people. However, some people actually prefer this additional privacy of lightning payments.
8. Which is best for bitcoin payments: on-chain or lightning?
Lightning payments are ideal for most bitcoin transactions, and especially for small, everyday payments. They’re completed almost instantly and have very low processing fees (usually less than a few cents).
On-chain payments are ideal for larger, less frequent bitcoin transactions. For example, if you’re making a significant purchase or sending large amounts of bitcoin, then many people prefer to make an on-chain payment that’s recorded on the public blockchain.