First officially elaborated in 2015 by Thaddeus Dryja and Joseph Poon, the lightning network is a solution designed to solve the transaction speed problem on bitcoin’s blockchain by providing the off-ledger transaction. It disintermediates some central institutions like banks that route many transactions today.
What’s a lightning network, and how does it work? Read on to know everything about the lightning network, including the advantages and disadvantages.
What’s the Lightning Network?
The lightning network is a second layer technology for bitcoin that utilizes a micropayment channel to scale blockchain’s ability to conduct transactions efficiently. The network adds an extra layer to bitcoin’s blockchain while enabling customers to set up payment channels between two parties on the added layer. Since they’re created between two parties, the channels can last long as required, and the transactions are fast while the costs are cheap or even free.
In other words, it helps bitcoin enhance its capability to scale or handle high transaction volumes while it still retains its unaltered structure. The network permits users to send and get their payments quickly with low transaction costs. It’s a smart contracts technology built on the bitcoin blockchain that permits quick and low payments between two parties.
As stated, the lightning network is first officially elaborated by Thaddeus Dryja and Joseph Poon in 2015. It’s a solution designed to solve the transaction speed problem on bitcoin’s blockchain by providing the off-ledger transaction. More so, it disintermediates some central institutions like banks that route many transactions today.
In simpler terms, the lightning network is a layer two network independent from the bitcoin network. Users must run nodes or trust third-party nodes and connect to the lightning network performing a bitcoin transaction. Once customers are connected, they could perform unlimited transactions with each other for no fee. In addition, if they want to quit the lightning network, they do it through a bitcoin transaction.
How the Lightning Network Works
The lightning network utilizes smart contracts and several signature scripts to carry out its aim; it uses several steps to achieve its vision.
Practically, the lightning network needs multiple signature wallets created by one of the two parties involved. The wallet address will be stored in the public bitcoin blockchain with a balance sheet. The balance sheet shows the amount of the added asset that belongs to people.
Henceforth, the two parties can operate unrestricted or many transactions without demanding the stored information in the blockchain. With every transaction, both parties can modify the balance sheet to display the currency amount of the wallet and who owns it. The recipient and sender can implement their transactions directly.
Rather than uploading to the blockchain, the involved parties can keep the updated balance sheet. When the channel of payment is closed, the involved parties utilize the adjusted balance sheet to pay for their wallet share. Thus, the major network of bitcoin processes the high transactions while the Lightning Network deals with the micro-transactions.
Customers have the chance to transact with another customer connected to the network via several hops. Meanwhile, only a few nodes are required to connect everyone on the network.
It’s vital to re-emphasize that the two parties can perform unlimited commitment transactions and other lightning network nodes.
A practical example of how the lightning network works is if Paul opens a channel using his tea shop and puts $50 worth of bitcoin on it. His transactions with the tea shop are quick since she has a direct channel with it.
Rita, with her channel, opens a poultry farm that she always visits, purchases tea from Paul’s shop. The link between Paul, the tea shop, and Rita ensures that Paul can utilize his tea shop balance funds to purchase chickens from Rita’s farm. In the same vein, Rita can utilize her poultry farm balance to perform transactions and businesses with Paul’s network.
If Rita closes her channel with her poultry farm, then Paul will need to open another channel with the poultry farm to buy from there. Thus, a cycle of transactions is made and routed among several lightning nodes under decentralized fashions.
The Problematics of Bitcoin
Bitcoin is the most popular cryptocurrency and presently has the highest valued crypto. However, it has its problems. One of the biggest shortcomings of the Bitcoin network is its block limit that often results in long delays in transaction settlement. Other problematics of bitcoin include;
1. Bitcoin currently doesn’t scale; it has 4.5 transactions per second for bitcoin, while Visa or MasterCard can process thousands of transactions per second.
2. When the bitcoin network is overloaded, transaction fees can be huge (there were times with 100$+ average fees per transaction).
3. Even when the network is not overloaded, the average transaction fee is usually around $2-10 dollars, making it too expensive for small transactions.
4. Bitcoin isn’t made for mainstream. It addresses world issues that are accessible to just a few. It’s mostly caused by technical design. Thus, mainly the financial risk and tech-savvy can access it.
Pro and Cons of the Lightning Network
|• Lightning Network helps to make transactions quicker. Payment, regardless of how small, can be settled quickly. Also, small transactions and tiny payments are possible. The lightning network can carry a high amount of transactions per second (e.g., 7000 tx/s). All these further make Bitcoin to be more popular and accepted globally.||• Users opening or closing a channel must perform the transaction on the main bitcoin network; it can be expensive or slow.|
|• It lowers fees and can even come with no fee.||• The lightning network isn’t designed to handle large payments because it operates mainly in small and medium transactions.|
|• Lightning Network enhances bitcoin’s general privacy. The transactions are encrypted and anonymous and are saved on the blockchain after the close of payment channels and when the balance is paid to both parties.||• It doesn’t support offline payment.|
|• It helps bitcoin enhance its capability to scale or handle high transaction volumes while still retaining its unaltered structure.||• Apps on the Lightning network aren’t accurately novice-accessible. It doesn’t have a user-friendly interface at the moment.|
|• The lightning network hasn’t been tested in every condition since it’s somewhat a new project.|
The Lightning Network has become an essential development for Bitcoin evolution and future. It’s a great solution in solving the continuous scalability and congestion issues of bitcoin. In particular, it helps to make transactions quicker. And payment, regardless of how small, can be settled quickly. Also, it carries a high amount of transactions per second with low or non-existent fees.
Written by: Narender Charan