What Is Lightning Network? Simply Explained And How It Works

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Since Bitcoin was first introduced by Satoshi Nakamoto in 2008, the very first public comment to James A. Donald on the network included the following line: “As I understand your idea, it does not seem to be as big as it needs to be.” Ten years later, Bitcoin and other veteran cryptocurrency networks still have the most serious problem with scalability.

What does scalability mean exactly? Okay, Bitcoin has only been able to process about 7 transactions per second throughout its lifetime. Although at the beginning this was enough, the network has been congested for several years now. Transactions often take a long time to process and transaction costs are extorting.

When Bitcoin ever becomes a fully operational alternative to existing payment systems, it inevitably has to compete with them. It’s not even near as of now. Compare the small 7 transactions per second with Visa’s 24.000 average, and its peak capacity of about 50,000 transactions per second, to understand the magnitude of the situation.

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Over the years, the Bitcoin community has given numerous recommendations on how to boost the scalability of Bitcoin, but there is still a rounding agreement. This is why we have several Bitcoin-like networks connecting from the original. Nonetheless, a proposed solution is currently being tested which could only succeed. The Lightning Network is named.

What is the Lightning Network?

At some point in history, the easiest and most efficient way of long-distance contact was to send a telegram. You had to go to your local post office, complete a form and pay your message based on the number of letters it contained. The message would then be sent to the closest telephone office to the remote end. A postman would then deliver the telegram to his place of business.

Essentially, many people had to send a simple short message and you had to pay a lot of money for it. That’s just about the current Bitcoin network standing. This comparison means that the Lightning Network is simply like getting an entity that you want to talk to on the speed dial: just hit’ 1′ and your friend’s phone is already ringing.

To put it simply, the concept behind the Bitcoin Lightning Network might have looked like this: we don’t have to keep track of each transaction on the blockchain.

Alternatively, the Lightning Network adds a layer to the Bitcoin blockchain and allows users to create payment channels on this extra layer between any two parties. Those channels can be built between two people and the transactions are nearly instantaneous and the fees are extremely low or even non-existent.

How does it work?

Enter Danny and Jon. Enter Danny and Jon. You may cooperate, be family or couples, the point is that you have to send money always, easily and with minimum fees to each other. They have therefore established a channel on the Lightning Network.

Firstly, you need to build a multi-signature wallet-a wallet that you can both use with your private keys. Then both deposit a certain amount of Bitcoin into that wallet-say 3 BTC each.

You can then carry out unrestricted transfers between the two. These transfers are redistributions of the funds deposited in the popular wallet. For example, if Danny wants to send 1 BTC to Jon, she will have to pass that amount’s ownership rights to him. The two of them then use their private keys to sign up for a new balance sheet.

When the door is closed, the actual distribution of funds happens. The algorithm uses the latest balances to figure out who gets what. If Danny and Jon choose to close the channel after the transaction, Danny gets 2 BTC and Jon gets 4 BTC.

Only after the channel is locked, the information is passed on to the Bitcoin blockchain about its initial and final balance. Therefore, the way the Lightning Network operates is that users can execute multiple transactions outside the main blockchain and then record them as a single transaction.

The exciting thing about it is that once you have implemented the technology broadly, you will not even have to set up a dedicated channel to send money to somebody. You can instead give payment to someone with people who are already related to you on channels. The program determines the shortest route automatically.

That’s how the Lightning Network may eventually respond to the endless debate about buying a cup of Bitcoins ‘ coffee. In its opinion, this can only operate across Lightning’s network, as it is an almost instant transaction that will incur no fees.

Safety. Security. Nevertheless, it should be remembered that the Lightning Network concept means that the system works above the blockchain, but does not have protection behind it. Therefore, it is highly likely to be used mostly for small or even fairly microscopic transactions. Greater transactions requiring decentralized protection are possibly still carried out on the original layer.

Lastly, another interesting aspect of the Lightning Network currently being tested is cross-chain atomic swaps, transfers of tokens between blockchains. Simply put, it is a way to switch any given crypto-month to another without using crypto-monetary exchanges.

In the end, this development could make unpredictable centralized crypto-currency exchange and trading problems obsolete. The first tokens exchange check between the Bitcoin and the Litecoin blockchains has already been completed.

Who behind it?

Who behind it?

In 2015, Joseph Poon and Thaddeus Dryja described the Lightning network in a white paper for the first time the current version of the white paper can be found here. Now, the three teams are jointly creating the Lightning Network: Blockstream, Lightning Labs and ACINQ, with knowledge from other Bitcoin participants.

Each of the above-mentioned start-ups works to implement the Lightning Network Protocol in its language.

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Also, other implementations are currently under development. Here is the complete list. Finally, it is important to mention that recent tests have shown that the three key implementations are completely interoperable, so they can work seamlessly.

Where, when and why will it be used?

The crypto-currency world appears to be looking forward to the introduction of the Lightning Network. It was originally designed specifically for Bitcoin, but currently a range of other cryptocurrencies, including Stellar, Litecoin, Zcash, Ether and Ripple, are developed.

In reality, Real Bitcoin was already sent and almost always received using the implementations of Blockstream, Lightning Labs and ACINQ to show that all three are interoperable. Also, the first edition of the lightning specifications detailing network rules was released.

Such specifications represent a major move for the network as they can be used by software developers and the Lightning Network implementation in other programming languages.

The network is still very early, however. There is no device that real-life casual network users can use to transact. The current implementation is still quite slow. Lightning Network developers have urged users not to send any real money but to learn about the network via the Bitcoin testnet.

Developers often advise users to remain patient, as the code of the network is very complex and requires thorough testing. The Lightning Network needs to prove to be stable and functional to be fully adopted by the Bitcoin community. With this in mind and many other variables, experts predict that a fully operational Lightning Network will take several months to a few years.

The answer is simple: scalability, as to why the network is used. If the network offers a solution to Bitcoin’s main problem, other cryptocurrencies will most probably take it.

If this happens, there is a chance of further developing atomic cross-chain swap technology, which is the first step towards truly decentralized cryptocurrency exchanges.

What is a lightning channel?

Lightning channels allow users on the Lightning Network to directly send and receive money from and to other users. It is almost like money pipes that are hooked up to each other, allowing payments to flow smoothly between users.

All Lightning channels are in the Lightning Network between two nodes. We’ll name them Alice and Bob in our case. The channel has a Bitcoin balance for Alice and Bob, which shows how much money they each have.

The designer will choose how much money he or she wants to have on that channel when making a Lighting Channel. An instance: Alice could make a Bitcoin blockchain transaction that gave her 100,000 satoshis on the Lighting Network. This exchange would then lock the same number of satoshis on the Bitcoin blockchain and unlock them in the Lightning network.

Once a lightning channel has been created, the owners can send and receive money. When Bob wants to send Alice 1000 satoshis, he will need an Alice Lightning invoice. In a previous blog post in this series, you can learn more about invoices. Through means of that invoice, he will give Alice a bill, increase Alice’s balance through 1000 satoshis and that his own by the same amount. All sides of the channel track each other’s balances to ensure that the numbers are applied.

Pros

As previously mentioned, the Lightning Network is only taking its first steps. It’s still very much in progress, and it’s still very clear whether it works as developers expect. If so, here are some of the key advantages of the Lightning Network: the transaction speed. You won’t have to wait for several confirmations from each transaction that you are trying to make when the network is live. The transfers are almost seamless, regardless of how busy the network is. In this situation, the blockchain market will take tremendous steps to compete with standard payment networks such as Visa, MasterCard, and PayPal.

Fees for purchases. Since the transactions are carried out within and outside the network, you only have to pay the smallest fees, if any. This is one of the Lightning Network’s main benefits, as this allows Bitcoin to be used as a payment method in supermarkets, cafés, bars and so on.

Scalability. Scalability. The Lightning network is said to be able to transact at least one million transactions per second in Bitcoin and other cryptocurrencies per second.

Atomic cross-chain trades. The first cross-blockchain transaction experiments succeeded, and all of this is quite interesting. Until both blockchains have the same encryption feature (and most key functions) users can send money from chain to chain without having to trust an intermediary from third parties, such as an exchange. The system has very revolutionary potential.

Anonymity and confidentiality. The vast majority of cryptocurrencies are not completely anonymous. The changes from one wallet to another can still be traced. Nevertheless, about the Lightning network, most of the transactions take place outside the main blockchain so that it is almost impossible to trace all the micropayments made by Lightning channels.

Cons

Not fully functioning. The main disadvantage of the Lightning Network at the moment is that it is not yet fully operational, so there is no way to confirm exactly how effective it is really. Also, it looks great on paper, but it is not yet possible to find out if it will look just as great once it has been realized.

System difficulty. The Lightning Network is a sort of network of channels that should theoretically allow seamless transactions once created. Nevertheless, there is no discussion of what will happen if the payment needs to go too far. For example, if your transaction involves hundreds of intermediary channels, the fees will be raised.

System caps. Network caps. Another downside of the network is that the channels are capped in its current version. That is, the amount of Bitcoins deposited in the wallet by both users when a connection is created is the most money on that channel. This set up creates a situation where certain users may have to choose between liquidity on the main blockchain within the Lightning Network and liquidity outside of it. This is far from ideal, especially for those with relatively limited resources.

Hubs. Hubs. Also, there have been questions about the development of’ hubs’-a kind of nodes with loads of capital that will be transferred through most transactions. This is seen by many Bitcoin enthusiasts as further centralization of the network. But these hubs are unlikely to benefit greatly from transaction fees.

Again, it should be noted that the advantages and disadvantages of the above-listed Lightning Network are at present very speculative.

Should I use the Lightning Network?

Okay, you can’t use Lightning Network even if you’re not an experienced customer. So the best thing–if not the only thing you can do now is to wait and see if the lightning network is up to speed, if it can function and be described and if it is safe.

Remember that the Lightning Network is not the only scaling plan, and is by no means the unquestioned competitor for the lead, with Bitcoin Cash (BCH). The dialog between the BCH supporters and the Lightning supporters is vicious and relentless. Any such idea could come up, theoretically co-exist, or a completely different solution could be found.

It sounds exciting to the Lightning Network. If it delivers, remember what your Bitcoins are used doing. If you use these tokens as a long-term investment and you don’t even need the Lightning Network, as it doesn’t seem completely safe to entrust the Lightning Network with large transfers.

But if you view Bitcoin as an alternative way of paying, the Lightning Network is important for you provided it meets your standards. Instant micropayments, increased anonymity, almost non-existent fees–most Bitcoin problems appear to have been resolved.

Dustin

Since 2011, Dustin has been an active member of the community of cryptocurrencies. Dustin is a Washington-based financial-tech reporter. He's passionate about bitcoin, open source code, and decentralized apps. Dustin wrote thousands of articles about the innovative protocols.

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