Types of Bitcoin Payments: On-Chain, Lightning Invoices, and Paycodes

When you receive bitcoin to Blink, you can choose between three payment methods: Lightning, Paycode and On-chain. This article will help provide a clear understanding of the benefits and limitations of these methods and the different payment scenarios each is best suited for.

1. On-Chain Bitcoin Addresses

These are traditional Bitcoin addresses for making payments on “layer 1” or the base layer of Bitcoin. They begin with a 1, 3, or bc1, and represent the destination where you send or receive Bitcoin. 

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When you make an on-chain transaction, that transaction is recorded on the Bitcoin blockchain which is a publicly viewable ledger distributed across tens of thousands of nodes around the world. Because each transaction is recorded to the blockchain, it is typically more expensive and takes longer to settle an on-chain payment than a payment on the Lightning Network.

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On-chain transactions are well suited for larger amounts where security is of utmost importance. For instance when you send your bitcoin to cold storage, you do so using an on-chain address for which you hold the private keys. 

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Pros:

• Security: On-chain transactions are the most trustless way to send Bitcoin. For example when you send your bitcoin to cold storage for long-term savings, you want to send bitcoin to an on-chain address for which you (and only you) hold the private keys. 
• Universality: Most Bitcoin wallets and Bitcoin exchanges support on-chain addresses, while Lightning payments are still not yet fully integrated across the ecosystem.

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Cons:

• Speed: It takes 10 minutes on average for an on-chain transaction to settle, and during times when the network is congested, it can take much longer. 
• Fees: Sending on-chain Bitcoin transactions can be expensive, particularly during peak times.

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How-to: Receive on-chain with Blink

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2. Lightning Invoices:

Lightning Invoices are part of the Lightning Network, often referred to as "layer 2" of Bitcoin. This system facilitates faster and cheaper transactions, especially ideal for smaller amounts. 

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A Lightning invoice is a QR code (or string of text) that a payer scans to send bitcoin. Lightning invoices are one-time use, so receivers must create a new invoice for each incoming payment. 

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Lightning invoices are particularly apt for everyday small transactions, like buying a coffee or paying a friend back for lunch.

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Pros:

• Efficiency: Lightning transactions are not confirmed on the Bitcoin blockchain, which means payment confirmation usually arrives in seconds or less.
• Affordability: These transactions have significantly reduced fees, making them perfect for frequent, small amount transfers.
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Cons:

• Interoperability: While Lightning has become a de facto layer 2 solution for sending off-chain bitcoin payments, not every Bitcoin wallet or service has adopted it yet. You might find some compatibility challenges.
• Invoicing: The need to create a unique invoice for every transaction can be seen as a little cumbersome for some users. 
• Expiration: Lightning invoices expire after a period of time (the expiration can range from minutes to hours), so they are not a good option for printing or publishing on a website.

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How-to: Create a Lightning invoice with Blink

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3. Paycodes (LNURL Pay QR Codes)

A useful development for the Lightning payment experience, LNURL Pay QR Codes offer a reusable method of receiving Bitcoin. Rather than the traditional single-use invoice, these QR codes can be scanned multiple times for multiple payments.

Using LNURL Paycodes eliminates the need to generate new invoices for each transaction, merging the simplicity of on-chain transactions with the benefits of the Lightning Network. Ideal for merchants or regular receivers, these QR codes provide a seamless transaction experience.

Pros:

• Convenience: No more generating multiple invoices. One QR code is valid for various transactions, enhancing the payment experience.
• Offline payments: Since they don’t expire, Paycodes can be printed and displayed on a table, a sticker or anywhere else. They can also be shared on a social media profiles and feeds.

Cons:

• Interoperability: Despite its rising adoption, not every Lightning wallet or service is LNURL-ready. It's wise to ensure compatibility before proceeding.
• Receiver control: Unlike with Lightning invoices or Bitcoin addresses, the receiver is unable to set an amount or a note to associate with the transaction. 

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How-to: Receive via Paycode with Blink

Conclusion: Each method is useful for certain scenarios

As Bitcoin continues to evolve, the ways in which we can send and receive payments also progress. From the foundational on-chain addresses to the near frictionless Paycodes, there are now payment methods that serve our needs across a range of scenarios.