What is the lightning network, and how does it work?

21.11.2022

Bitcoin, the world's most recognized cryptocurrency and innovative payment network, has undoubtedly revolutionized the financial system, giving more users control over their money. But despite its global adoption, the bitcoin blockchain cannot handle many transactions as it was not designed to be scalable.

The bitcoin blockchain can only process an average of 7 transactions per second which is ridiculously low for such a global payment system. Scalability has always been one of its significant shortcomings, which led people to search for a secondary and more efficient payment system, such as the Lighting Network.

what is the Bitcoin Lightning Network

So, what is the Lightning Network'? The Lightning Network is a transaction mechanism and a second-layer protocol on the bitcoin blockchain, which allows users to send and receive bitcoin quickly and at a low cost by moving transactions off the main blockchain. The lightning network tps is over 1 million transactions per second, a remarkable figure compared to the conventional bitcoin TPS. This article explains everything you need to know about the Lightning Network, how it works, and the pros and cons.

Let's Take A Closer Look At How The Lightning Network Works

So to answer the question, 'what is Lightning network?' The Lightning Network is a second-layer protocol capable of processing millions of transactions off the main Bitcoin blockchain quickly and efficiently. So, how does the Lightning Network work?'

First and foremost, you must understand that the Lightning Network is built upon a smart contract that initiates the off-blockchain payment channels between two parties. Payments between these two parties can be made once these payment channels are established.

The smart contract codes enable all requirements between the parties to be fulfilled. This means that the rules of agreement binding the transaction are coded into the smart contract upon creation. For example, with the Lighting network, Charles can open up a payment channel with a grocery shop, and each item bought is recorded within that channel. Charles can make unlimited transactions, and the shop will get paid.

However, Charles can also choose to close the channel, and when this is done, all the transactions will be consolidated and recorded on the main blockchain layer. So, with the Lightning Network channel, transactions are usually cheap and instant, and you only pay fees to open and close the transaction channel. In addition, the Lightning Network has a channel that makes payments possible. This Lightning Network channel is a two-party or bidirectional transaction mechanism where two parties can send or receive payments across the channels.

Examples Of The Use Of The Lightning Network

The Lightning Network Transactions per second and its low cost are unique attributes of this channel that have made it possible for some systems to adopt it for practical use. Now that we've been able to answer the question, 'how does Lightning Network Work ?' Let's take a look at some of the prominent use cases of the Lightning Network.

  1. Lightning Network has enabled social media users to support their favorite influencers by tipping them to create online content. For example, Twitter users can send and receive Bitcoin tips through the Lightning Network. This is achievable using STRIKE, a payment app compatible with the lightning network. This payment gateway allows millions of Twitter users to instantly send Bitcoin payments to other Twitter accounts.
  2. In the quest to save Salvadorans about $400 million in annual money transfer fees, the government of El Salvador decided to make Bitcoin a legal tender in the country, making it the first nation to do this. The national government designed Chivo, another lightning network-compatible app to enable seamless cross-border payments at low transaction fees.
  3. In a similar development, Paxful, a P2P Bitcoin exchange platform that processes a high volume of Bitcoin transactions daily, recently announced it would enable Lightning payments. This will mean that users can now carry out transactions quicker and cheaper between millions of users of this exchange platform.

The Future of Lightning Network

Lightning Network channel

Now that we've had the Lightning Network Explained comprehensively, let's look at how the future of Lightning Network can evolve. The Bitcoin Lightning Network is increasingly becoming more popular. It is now estimated that over 4,800 Bitcoins, equivalent to $100 million, are in the Lightning network.

The lightning network is undoubtedly considered the next evolutionary step of Bitcoin, and global adoption is massively proliferating daily. More people now use it to make payments online. Also, it has been found that more apps and wallets that are compatible with the Lightning Network have been built, and more users are creating more lightning network channels on platforms and systems hosting bitcoin transaction gateway. It has been forecasted that more developers will integrate the Lightning Network support into their payment systems if the Lightning Network adoption continues to spike.

Furthermore, in recent developments, some cryptocurrency exchanges are beginning to support the Lightning protocol, ensuring that more traders can now access it. On these exchanges, traders and platform users can withdraw smaller amounts of BTC swiftly and at a low cost. Without any iota of doubt, the future of the Lightning Network indeed looks splendid.

What Are The Issues It Is Trying To solve?

The Lightning Network was created to solve some problems the Bitcoin blockchain faces. Initially, the Bitcoin blockchain was created to handle small amounts of transactions. The Bitcoin transactions per second, which is at 7TPS, isn't enough to deal with the high volume of transactions on the blockchain, and this is where the Lightning Network takes effect. Below are some of the issues the Lightning Network seeks to correct.

  1. Speed In Confirming Transactions: It has become imperative to improve or increase the speed of confirming transactions on the Bitcoin blockchain due to more users transacting on it. Unlike the Bitcoin blockchain, which has low Tps, the Lightning Network can process 1,000,000 transactions per second which is quite impressive.
  2. Reduce Energy Requirements: No doubt, it's pretty expensive to maintain the Bitcoin blockchain due to high energy and computational requirements. In sharp contrast, Lightning Network is cheaper and provides an economical way to make payments and handle a high volume of transactions.
  3. Introduce Smart Contracts And Multi-Signature Scripts: Smart contracts and Multi-Signature scripts are the major protocols of the Lightning Network. Their importance cannot be overemphasized. They help to ensure these funds are sent through the channels and get to the recipients.

It should be noted, however, that the Lightning Network uses different channels that the participants can use to make their payments, and these funds are shifted between the users unless the channel is closed. Transactions are usually sent to the main net for confirmation once the channel is closed.

Pros of Lightning Network

Now that you know what is Bitcoin Lightning Network, we've also discussed examples of how to use Lightning Network. It's time we look at the pros and cons of this system. The major advantages of this Lightening Network are: Faster and Cheaper Transactions, it is secured, and it's scalable. Let's take a look at each of them.

  1. Faster and Cheaper Transaction: The Lightning Network has made it possible for users to make transactions very fast without having to pay high fees. The Lightning Network can process over 1,000,000 transactions per second.
  2. Security: The Lightning Network also enjoys Bitcoin's security protocol since it is connected to the Bitcoin blockchain, existing as a secondary layer. In addition, you can carry out private transactions on the Lightning Network payment channel. This makes the transactions exclusive to only the participants or users.
  3. Scalability: The Lightning Network is scalable, meaning users can jump through various payment channels. For example, if user X is connected to user Y, and user Y is connected to user Z, then user X can transact with user Z without opening a new payment channel.

Cons of Lightning Network

Despite the advantages of the Lightning Network channels, there are some disadvantages. Some cons are:

  1. You need to buy a compatible wallet with the Lightning Network: This is a challenge to most users, and a user will still have to fund the wallet from a traditional Bitcoin wallet which will cost a fee. This means that users indirectly still lose some Bitcoin while interacting with the protocol.
  2. Fraudulent Offline Transaction: This is another great challenge of the Lightning Network. If one of the two-party in a payment channel chooses to close it and the other party is offline, the former might steal the funds. When the latter party comes online, it will be too late to do anything.
  3. Regulatory Bodies: Lightning Network may find it hard to get the endorsement of the regulatory bodies due to the network's anonymity. This makes it hard for regulators to understand the protocol and, in turn, find it hard to enact proper legislation.

History of Lightning Network

Having discussed the Bitcoin Lightning Network crypto to million transactions, let's go down memory lane as we look at the history of Lightning Network.

The Lightning Network was initially documented in a whitepaper in 2015 by Joseph Poon and Tadge Dryja. The paper titled 'The Bitcoin Lightning Network' was published the same year. Before 2015, the anonymous creator of Bitcoin, Satoshi Nakamoto, described payment channels to his fellow developer Mike Hearn in 2013, and this conversation was also subsequently published.

The paper abstract contained information about an off-chain protocol made up of payment channels. In 2016, Joseph Poon and Tadge Dryja created lightning labs along with some other contributors. Lightning Labs is an organization responsible for developing the Lightning Blockchain Network. The organization worked to make the Lightning protocol compatible with the Bitcoin network.

By 2017, there was a breakthrough after Bitcoin's fork. Alex Bosworth used Lightning to pay this phone bill, which became the first real-world transaction over a lightning network channel.

Subsequently, in 2018, lightning labs launched a beta version of the Lightning Network implementation, and it was around this period that former Twitter CEO Jack Dorsey began his involvement with the project by donating $2.5 million in seed funding, and Bitpay recently announced its support for the Lightning Network payment.

While Bitcoin is the primary cryptocurrency with the Lightning Network's support due to its limitation in scalability, other coins like Ethereum and Litecoin have also considered it to improve their scalability.
Some payment merchants like Bitpay will provide you the option of paying invoices via Lightning Network. You will scan the invoice QR code, choose your wallet, and pick Lightning Network as your cryptocurrency. To access the Lightning Network, you need to enable a Lightning wallet.
The Bitcoin Lightning Network is super fast. It can process 1,000,000 transactions per second (TPS) compared to the Bitcoin blockchain, which can only process just 7TPS.
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