There are two fundamentally different types of systems financial institutions use to implement transactions. In a net system bank A batches up outgoing and incoming transactions with bank B, typically for a day, then the bank with more outgoing than incoming funds sends the other bank a single transaction for the difference. In a gross system bank A executes each outgoing transaction to bank B separately.
If, at the end of the day in a net system, bank B owes bank A money bank A has in effect made bank B an interest-free day-long loan. So the participants in a net system need to trust each other to repay these loans. In a gross system each transaction stands alone; there are no such loans and thus no need for trust. Instead there is a need for cash reserves. Capital must be available to cover the worst-case sequence of outgoing transactions. In practice this is much greater than the end-of-day difference between outgoing and incoming transactions. The advantage of lack of trust comes at the cost of the foregone interest on the greater cash reserves. The trust in a net system creates a pool of zero-cost liquidity.
In the days when transactions involved paper checks daily net systems were natural. But when electronic systems became common, it became obvious that a real-time, and thus necessarily gross, system was possible. Wikipedia explains:
Real-time gross settlement (RTGS) systems are specialist funds transfer systems where the transfer of money or securities takes place from one bank to any other bank on a "real time" and on a "gross" basis. Settlement in "real time" means a payment transaction is not subjected to any waiting period, with transactions being settled as soon as they are processed. "Gross settlement" means the transaction is settled on one-to-one basis without bundling or netting with any other transaction. "Settlement" means that once processed, payments are final and irrevocable.Wikipedia is wrong about the “high-value” part. Using my UK bank’s website, I can make small real-time payments at zero cost.
RTGS systems are typically used for high-value transactions that require and receive immediate clearing. In some countries the RTGS systems may be the only way to get same day cleared funds and so may be used when payments need to be settled urgently. However, most regular payments would not use a RTGS system, but instead would use a national payment system or automated clearing house that allows participants to batch and net payments. RTGS payments typically incur higher transaction costs and usually operated by a country's central bank.
When central banks introduced RTGS, it had unanticipated results. David Gerard writes:
Izabella Kaminska takes you through how real-time gross settlement works in the real-life banking system — and how instant settlement turned out to be deadly to liquidity, and what this means for central bank digital currencies. “Banks needed funding not credit because without such funds in situ, real-time settlement could not be contractually achieved. That pre-funding need, however, would heighten the system’s sensitivity to logjams imposed by single institutions, and with it threaten total system gridlock.” See also Izzy’s Twitter thread of research — “What i find most interesting about all this is how it ultimately relates to the cost of pre-funding tx in any real-time system, and the degree such a set up will always be more expensive than a netting-based alternative that operates on trust.”Kaminska's history of RTGS is a fascinating read.
The whole point of cryptocurrency systems is to eliminate the need for trust. Thus they have to be gross rather than net systems. Thus Bitcoin is gross, but not real-time because of the need to wait (typically six block times or one hour) to be certain that the transaction is irreversible. This delay, and the uncertain and potentially large transaction fees, have made Bitcoin useless for retail transactions. The Lightning Network was intended to fix this problem, by providing cheap, near-real-time gross transactions. But it is another example of the cost of lack of trust, because of the need to provide the channels with liquidity. David Gerard asks:
"How good a business is running a Lightning Network node? LNBig provides 49.6% ($3.7 million in bitcoins) of the Lightning Network’s total channel liquidity funding — that just sits there, locked in the channels until they’re closed. They see 300 transactions a day, for total earnings on that $3.7 million of … $20 a month. They also spent $1000 in channel-opening fees."$20/month for 300 transactions/day is 0.2c per transaction. To cover 1% interest on $3.7M would need 34c per transaction. But raising fees by a factor of 170 would certainly reduce the number of transactions significantly, so increasing fees and driving an economic death spiral.
So $20/month earned by a $3.7M investment makes it worth the risk of being indicted for violating the Bank Secrecy Act? Because decentralization!
If running a Lightning Network node were to be even a break-even business, the transaction fees would have to more than cover the interest on the funds providing the channel liquidity. But this would make the network un-affordable compared with conventional bank-based electronic systems, which can operate on a net basis because banks trust each other.