What is the Lightning Network?

What is the Lightning Network?

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what is lightning network

Lightning Network (LN) is a network designed to speed up Bitcoin blockchain transactions. Currently, it can process too little amount of them, making it work too slowly. With Lightning Network, the load on Bitcoin’s network can be alleviated.

What is the Lightning Network for?

Many Bitcoin critics point out the limited number of transactions that the network can process. Currently, it is between seven and twenty transactions per second. Comparing this to Visa, which is able to process 65,000 transactions, it is clear that there is a great need for improvement.

Lightning Network is a network that would enable express Bitcoin payments. Thanks to this, the time needed to approve transactions would decrease from about 10 minutes to a few seconds.

An important advantage of this network is that transactions would become much cheaper. This solves some of the major obstacles to using BTC as a daily payment method, and this is certainly a good step for the development of the crypto.

How does Lightning Network work?

The network works as a separate project, coexisting with the BTC network. This solution allows users to group transactions into batches and execute them out outside the chain. Then they are synchronized with Bitcoin blocks. People who want to transfer funds between themselves can open a new channel or use the available one. The funds will be transferred after the channel is closed and the network algorithm will use the last signed transactions to update the account balance. The funds are blocked on the payer’s account and sent with the next block to the account of the person to whom they are addressed. It resembles a network of payment card transactions.

Similarities to the payment card system

The easiest way to understand complex concepts is to compare them with something we already know. Lighting Network can easily be compared to the payment card system used by banks. Thanks to it every user can easily and quickly pay in the shop. The payment is immediate and although the money is not immediately transferred to the shop’s account, it is blocked on the buyer’s account, thanks to which the bank is sure that the user has the money necessary to buy.

How does this apply to transactions in the blockchain? Every owner of a cryptocurrency has a public address – that is an account number – and password – a private key. If you want to make a transfer, the bank – that is the crypto community that accepts transactions – must approve it. In this case, you would have to wait until the next incoming session, that is a new block in the BTC network. This makes the whole process slow. Therefore, it should be accelerated. And here comes LN.

the linghtning newtwork card system

History of instant transfers in the BTC blockchain

The need for off-chain transactions is almost as old as Bitcoin himself. They are cheaper and faster and Satoshi Nakamoto himself has probably already taken this into consideration. Bitcoin 0.1 contained a piece of raw code, allowing the user to update the transaction before confirming it.

Over the years, there have been repeated attempts to solve this problem. In 2011, one of the users of the Bitcointalk forum outlined a payment method similar to the current LN operation, which would work on an overlay basis. Despite its innovation, the project would allow for one-way payments through the channel only. A second channel had to be created for payment in the other direction, which ultimately proved to be too difficult.

Among others, not the best ideas over the years, the solution of the mathematician and future co-founder of emBassa TLV, Meni Rosenfeld, stood out in summer 2012. A proposal was also made at the Bitcointalk forum. It was supposed to be a system in which a payment processor would take over the role of an intermediary. It could have channels with different payment processes, that is with a large number of customers. The system had one flaw.
If the person ordering the transfer would refuse to transfer the payment and the other sooba would not notice it and leave the channel. Her money would be lost forever. The problem would have been avoided by carefully checking the account balance manually and not sending large amounts of money at once.

The beta network was launched by Lightning Labs on March 15, 2018. The idea came back several times, but it has never been implemented and adopted more widely.

Years of development allowed to invent Lightning Network

In 2015, they were able to create something that had a chance to develop sensibly. This was done by Thaddeus Dryja – director of smart contract trading platform technology Mirror – and Joseph Poon. Together they created and published the White Paper: “The Bitcoin Lightning Network: The Bitcoin Lightning Network: Scalable Off-Chain Instant Payments.”

This solution turned out to be a game-changer.

None of the participants could start a fraudulent attempt without risking all their money, so trust was unnecessary. Additionally, the solution did not require too many changes to the Bitcoin protocol (which was a pain in some, other solutions). From that moment on, users were given a chance to send an infinite number of transfers between them, working both ways.

Although the project was developed from 2015, the breakthrough came 2 years later. On December 6, 2017, for the first time payments were made with the Lighting Network in the main Bitcoin network, earlier such transfers were made only in a test version. At least 3 large groups of developers, using different programming languages, are working on the development of this network. These include Lightning Labs, Blockstream, and ACINQ.

Lightning Network for Bitcoin

LN is a technology designed for Bitcoin and currently, no other cryptocurrencies can boast of such solutions. However, it is not only necessary for BTC. It or its equivalent is necessary for any crypto project. It will make all crypto transactions fast and cheaper, attracting more and more followers.

Advantages of the Lightning Network

The LN project aims to solve the scalability problem by going beyond the main blockchain. This solution will result in a significant reduction in the Bitcoin network load. It will also allow for immediate and cheaper transactions. At the same time, reducing waiting time and transaction costs for micropayments, even those of 1 satoshi, will become possible. They will take place without human intervention.

Network limitations

LN payments cannot be made when the recipient is not available. In Bitcoin transactions this is possible. Network participants should regularly monitor payment channels to ensure that their funds are secure (however, this danger can be mitigated over time and network development).

Lightning Network is not suitable for payments that are too large, as there is a risk that portfolios will not have enough funds to act as intermediaries for large payments. It is easier and safer to split them into smaller payments.How to start using Lightning Network

The second layer of the network

LN is called the Bitcoin blockchain overlay by some programmers. However, it is easiest to compare the operation of the network to that of payment cards. Without payment cards, the functioning of banks would be possible but would be significantly reduced. Without them, waiting for each transfer would take several hours or more. Waiting for payment confirmation, for example, for a transfer in a shop, would be inefficient.

The services of banks would then become much less common and less needed, but banks would be able to continue to operate with other tasks without problems. The Lightning Network still has some limitations and shortcomings, but it is likely to outweigh its advantages over time, and more and more people using it in secret will also reach for LN.

second layer of the network

Usage of Lighting Network

Although the technology is not yet fully developed, you can already use it by making instant crypto transfers. There are even several versions of mobile wallets that allow users to make instant payments as well as to open network channels.

Payment channels

The Lightning Network is based on a mechanism of so-called payment channels, which are the related bitcoin account numbers. They function in a similar way as in the traditional banking system. If a user wants to transfer funds immediately without waiting for the next block (banking session) he can do so. Thanks to the transaction channels, transfers are transferred during internal networks in just a few minutes. How does it work exactly?

A simple example of use

If this technology still sounds like it’s too complicated, we can discuss it as a simple example.

Let’s assume that we have our favorite restaurant, from which we often order food. So we set up a channel with it, which from now on will act as a kind of safe-deposit box for the money stored there. Let’s assume that we deposit 1 BTC there. From now on, every time we want to order food, the restaurant will be able to take the appropriate amount of money from our “safe”. The restaurant will not be able to cheat us because we will have to confirm the transfer of funds.

The transaction will not go to the blockchain, so it will not wait to be checked, but it will go on immediately. You can use the funds on the channel until it’s over, or before the channel is closed. In this case, the money is divided according to the last record and the transaction is saved in the blockchain. All transfers are thus secure and there is no possibility of fraud.

How to start using Lightning Network?

Using Lightning Network is very simple. To open and close channels you just need to scan the QR code from the person you want to share a channel with and make the first transaction. After receiving a sufficient number of confirmations from the BTC network, instant transfers will become possible. Closing transaction channels is equally easy. It only takes one click to update your account balance. It is sent to full network nodes, that is. computers holding the full history of Bitcoin transactions. It waits there for the next transaction block, which will be a reliable record of your account balance in the BTC network.

Appropriate applications have also been created to act as wallets in this network. Thanks to that everything is available and easy to use. Their full ranking can be found on the website lightningnetworkstores.

lightining mobile wallets

Safety aspect

Intermediaries who rely on the banking system may commit fraud by not transferring client funds for the purposes for which they were intended. In Lightning Network technology such a situation cannot happen, as opening a channel is a mechanism similar to opening a common bank account for a company. It is the person opening the channel, as in the case of a joint account, who decides who will have access to it and will be authorized to access it.

It is also not possible to block the spending of funds contained in the transaction because when opening a channel, the payment intermediary is obliged to accept in advance the account balance entered by the sender and sign it in an appropriate manner. If the sender then signs the transaction, the channel will be closed with the correct balance. There are always two parties who have access to the transfer, which they approve and are able to detect any errors.

Development and adaptation

The network is developing very dynamically. The number of people interested in this solution is also growing. It is worth emphasizing here that users of cryptocurrencies cannot be forced to update or start using a solution. They have to start using certain updates and overlays, like LN, slowly and consciously.

You can already benefit from instant transfers using Lightning Network technology. There are several wallets on Android and iOS for instant payments, sample wallets are: Eclair Wallet, Blue Wallet, or Bitcoin Lightning Wallet, which allow you to use Lightning Network functionality. However, it is important to remember that this is not yet a fully finished technology and you should not put more money in the channels than you can risk, at least until the major developers working on the project announce completion.

Although the project is not in its final version, many people are interested in it. As you can see in the chart below, the number of nodes in the network is constantly growing. This may indicate the need for such a solution, as well as the amount of interest in it when it is ready.

lightning network popularity

Source: bitcoinvisuals
 

As a general rule, the more nodes, the more open channels should be in the network. However, it is not so colorful here. After rapid growth at the beginning of 2019, the number of open channels has decreased slightly.
Currently, there are about 30 thousand unique channels (that is the ones that joined together for the first time, and about 3 500 channels connecting the same nodes once again. At the peak, the total number of channels exceeded 40 thousand.

growing channels lightning network

Source: bitcoinvisuals
 

Will we get a flash instead of lightning?

The answer to the BTC bandwidth problem seems essential. However, the solution must be perfect. Will Lighting Network be able to satisfy demanding users? The project, which only a year ago went like a storm, is now losing some of its supporters.

The charges against Lightning Network

A team of scientists has accused LN of becoming increasingly centralized. Only 10% of the nodes control 80% of the network. This is due to very low transaction fees and, consequently, less interest from miners.
The fewer miners, the fewer users will find the network attractive and their number will start to fall. There have also been reports of insufficient privacy protection in LN.

A great opportunity

The Lightning Network is a great opportunity for the crypto. It is not known whether it will gradually lose its followers, or whether it will manage to rebound and return to its previous growth rate. Certainly, this type of solution is essential for both BTC and the rest of the cryptocurrencies However, if the LN developers don’t fix all the bugs and spread their network properly, the idea itself may turn out to be insufficient.

Their solution may be a way to the next breakthrough in the crypto world or just an inspiration for the competition. Whatever happens, sooner or later the rapidly developing crypto world will be solved, which will answer such problems and enable immediate payments. But when will it happen?

Katarzyna Małusecka

About The Author

Katarzyna Małusecka
Content Marketing Specialist

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