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The Lightning Network is a micropayments protocol that’s been hotly debated in the bitcoin scalability realm. Vitalik Buterin coined the term “scalability trilemma”. It introduces a trade-off between three important blockchain properties: decentralization, security & scalability.
How do you scale a cryptocurrency while keeping the base blockchain sufficiently decentralized and secure? That’s the challenge. Many believe blockchains can only achieve 2 out of 3 of these traits at one time. Some other projects claim to have solved the trilemma completely.
Scalability is one of the biggest challenges for Bitcoin and Lightning Network came in response to this. In this context, when we talk about scalability we refer to transaction processing scalability. Specifically, Bitcoin’s 8 transactions per second compared to Visa’s average of around 1,700 transactions per second.
The Lightning Network was first introduced in a white paper by Joseph Poon and Thaddeus Dryja in 2015. It’s a “Layer 2″ payment protocol that operates on top of Bitcoin and according to the authors:
“Creating a network of micropayment channels enables bitcoin scalability, micropayments down to the satoshi, and near-instant transactions”
So what is Lightning Network?
The Lightning Network adds another “layer” to Bitcoin’s blockchain and enables users to create payment channels between each other on that extra layer. These channels exist for as long as required. Once opened, participants transfer bitcoin to each other securely off-chain.
The network effect means that you don’t need to set up a channel with every participant. For example, suppose Bob doesn’t have a payment channel with Alice but wants to send her some Bitcoin. He can do this if he has a channel open with at least one other user. The network forwards the transaction amount to the destination.
It comes back to the scalability debate and Lightning is one clever approach to solving this problem. Lightning enables low fees, quick transactions, and micropayments. It’s also suggested that it will deter against Bitcoin blockchain centralization because it will take a lot of the low-value transaction volume off-chain.
It has gained significant growth over the last year and looks set to grow further in 2019.
How does it work?
The process starts with creating a multi-signature wallet. This is a wallet that both parties can access with their respective private keys. After that, they both deposit a certain amount of Bitcoin to this wallet with a funding transaction.
Now they can both perform transactions between each other off-chain on the Lightning Network. These transactions are redistributions of the funds stored in the shared multi-sig wallet. The actual “net settlement” happens when the channel gets closed because the algorithm uses the most recent balance to see who gets what. Therefore, only the opening and closing of a channel gets broadcast to the Bitcoin blockchain with all the transactions in between remaining on the Lightning Network.
Cryptography ensures that neither party can steal from the other and the initial funding transaction acts as a kind of stick to deter cheating (this funding transaction can be taken from dishonest actors).
As mentioned, payments are forwarded to peer nodes (called a “hop”) until the payment gets to its intended recipient. Thus, this allows someone to send funds to another user without having a direct payment channel with them.
From the Lightning paper:
“Conceptually, this system is not an independent overlay network; it is more a deferral of state on the current system, as the enforcement is still occurring on the blockchain itself (albeit deferred to future dates and transactions).”
How can I use Lightning?
There are now many different apps available that use the lightning network.
Eclair Mobile is a popular lightning-ready Bitcoin wallet. It’s a regular Bitcoin wallet and can also connect to the Lightning Network.
Why not set up a lightning node and join the network! As of writing, there are over 8,600 nodes on the network.
What are the pros and cons of Lightning Network?
Lightning is growing stronger, node by node. It will increase its presence over the next year as more nodes join and more wallets start supporting Lightning. Channel capacity is also increasing with the first 1 BTC Lightning Channel live recently.
Second layers such as Lightning and protocol improvements like Segwit are ways in which Bitcoin is addressing the scalability trilemma. We hope this article gave a gentle introduction to Lightning and why it’s important for Bitcoin. We recommend you read the white paper for a more in depth insight.
If you want to buy Bitcoin online check out our article here: