Bitcoin has a huge scaling problem–Lightning could be the solution

Opening a Lightning payment channel doesn't require your master private key. You'd create an initial transaction using your primary wallet (which would presumably be in cold storage) to open the Lightning channel and fund it. There's no relation between the two, _at all_. A funding transaction is no different from any other transaction.

By design, the Lightning hot wallet can only hold small amounts of BTC (0.042 BTC currently), and yes, this would be essentially a hot wallet. The funds are held in a trustless, multi-sig, timelocked payment channel between you and your channel peer (which does not have to be the intended recipient). A channel can stay open indefinitely, and it will be possible to replenish it as needed. The idea is to have it function like a checking account. I fail to see how this is any different from a regular BTC wallet on your phone, or even your bank/investment app (except safer).If you're really paranoid about the funds in your hot wallet, you're free to create an m-of-n multi-sig wallet with somebody else you'd trust, which renders that attack vector useless.

Also, your LN wallet needs to remain online _only_ when it needs to transact. It can go offline the rest of the time with no problem. When it needs to make a LN transaction, it'll need to remain online for the duration of the transaction (a few seconds), or else the fund recovery mechanisms will kick into place.

Nano previously called Raiblocks is an amazing candidate for fee-less, instant transactions. The block-lattice approach is a fundamental breakthrough that overcomes the limitations of blockchain in terms of cost and speed.

Stellar is also a worthy contender although it wasn't designed with the purpose of payments, but decentralised currency/crypto exchanges.

The Lightning Network daemon codebase on Github is a beautiful well commented piece of Golang code though.

Lightning appears to add more problems than solutions. It has a whole bunch of critical issues. Here is a short list.

1. You need to have a computer constantly online or your counter party can easily steal all your money. This leaves you vulnerable to all sorts of attacks.

2. The lightning network works by routing payments through a network to your destination. The issue here is that the routing for the lightning network is extremely complicated and is currently an unsolved (and probably unsolvable) problem. The core issue is that you have to route money though a network where channel capacities are changing with each and every transaction. Imagine trying to route internet packets if the size of the links changed thousands of times per second.

3. It's relatively expensive to create and destroy channels at about two transactions per channel. Lightning proponents claim that this will be rare, but that can only be the case if there is minimal net flow of money. This is trivially not the case because users will be sending bitcoin more than they recieve and the reverse for retailers.

4. Lightning has huge capital costs. You need to lock up large amounts of bitcoin in these channels for significant amounts of time. There is a real cost for this in terms of the lost interest. Channels are certainly not anywhere close to free.

> uses a more power efficient mining algorithm

Thats axiomatically impossible. Its the amount of energy required, not nhashes/etc, that disincentivize an attacker from rewriting history.

I was wondering recently, why Bitcoin is even needed for a Lightning-like network? Just settle the channels in cash (or even bank transfers), it won't be any more traceable than Bitcoin. Moreover, there is a successful precedent of such network: https://en.wikipedia.org/wiki/Hawala

Seems like a large enough "overlay network" over cache reserves and bank accounts can be made barely traceable and pretty efficient.