What is Bitcoin Lightning Network

What is Bitcoin Lightning Network, and How Does It Work?

One of the major challenges that affected Bitcoin’s early adoption in day-to-day transactions is its low scalability. Bitcoin can only process seven transactions per second. The low transactions per second (TPS), make it unsuitable for a large number of users. Therefore, users may experience congestion, high transaction fees, and a long waiting time before their payments are confirmed. Lightning Network was designed to solve this problem.

What is Bitcoin Lightning Network?

Bitcoin Lighting Network is a second-layer (L2) solution on the Bitcoin blockchain that enables off-chain transactions. The solution allows parties that are not on the blockchain network to transact quickly without waiting for the block confirmation. The second layer is made up of multiple payment channels between parties or Bitcoin users. The solution enhances the scalability of blockchain applications by managing transactions outside the first layer of Bitcoin (L1) while benefiting from the powerful security features of the mainnet.

A Brief History of Bitcoin Lightening

The Lightning Network was proposed by two researchers, Thaddeus Dryja and Joseph Poon. In the paper titled “The Bitcoin Lightning Network”, the co-founders described an off-chain protocol and detailed how it was going to help Bitcoin achieve high scalability to make it viable for mainstream adoption.

In 2016, Dryja and Poon founded Lightning Labs, a company that would be dedicated to developing the Lightning Network. The Lighting Labs team worked to make the protocol compatible with the core Bitcoin network. The team launched a beta version of the project in 2018 after pre-launch testing. At this time, some public figures started to involve with the project. For example, Twitter founder, Jack Dorsey hired a group of developers to focus on Lightning Network development. He paid the team members in Bitcoin. He also had a plan of implementing the Lightning Network into Twitter.     

How Does Bitcoin Lightning Network Works?

Bitcoin Lightning Network allows users to create a peer-to-peer transaction payment channel between two transacting parties. The channel enables the users to send an unlimited amount of transactions that are nearly instant and low-cost. With this channel, users can make many smaller transactions such as paying for coffee, without affecting the Bitcoin mainnet.

A user is required to lock a certain amount of Bitcoin into the network to create a payment channel. The recipient of a bitcoin transfer can invoice any amount of the locked Bitcoins. The user can keep the channel open by adding Bitcoins consistently. The two parties can transact on the channel indefinitely without telling the main network.

Bitcoin Lightning Network achieves high transaction speed since all transactions within a blockchain do not need to be approved by all nodes. Lightning Network nodes that route transactions are formed by combining individual payment channels. Therefore, Lightning Network is the outcome of many payment systems that are linked together.

The transacting parties can choose to close the channel when they have finished transacting. Once the channel is closed, all the information in the channel is consolidated into one transaction and sent to the core Bitcoin network for recording. Simplifying many small transactions into one ensures that they do not spam the network at once, enabling nodes to validate them easier and faster.

Without these channels, small reactions will clog the network lowering transaction speed and increasing transaction fees.

The Lightning Network offers smart contracts where the rules of transactions are coded and automatically executed upon meeting the condition. The rules remain immutable once they have been deployed to the network.

Also, the network anonymizes transactions within a payment channel once validated. Other network users can only see the total transfer of value and not the individual transactions within it.

What are the Benefits of Lightning Network?

The main advantages of Lightning Network are faster and inexpensive transactions. It enables micropayments in an unprecedented way. Without the solution, users would be paying a lot of fees for simple transactions and wait longer for them to validate. Smaller transactions often have longer transaction times as miners prefer larger transactions that earn them larger rewards.

Transactions on Lightning networks also enjoy Bitcoin’s security protocol. The network also allows private transactions since onlookers cannot view every individual transaction, but only the overall package.

What are the Challenges of Lightning Network?

Not all Blockchain wallets are compatible with the Lightning Network. Finding these wallets could be easy. However, users have to fund them from a traditional Bitcoin wallet, a process that costs a fee. Losing some Bitcoins to interact with the protocol may be annoying and expensive for new users. Nevertheless, some wallets can manage both on and off-chain transactions thus eliminating these charges.

Another major challenge is offline transaction scams. One party in a transaction can choose to close the channel and steal funds when the other party is offline.

Wrapping Up

The Lightning Network solves one of the major challenges hindering the mainstream adoption of Bitcoin. The adoption of the solution is growing rapidly. Various cryptocurrency products, such as cryptocurrency exchanges, are adopting Lightning Network. Such exchanges can allow users to perform small transactions such as withdrawing smaller amounts of Bitcoins and cheaply.

The use cases of Lightning Network are likely to increase as long as Bitcoin adoption continues to increase, requiring higher scalability.