The Lightning network is described as a payment protocol. It exists as a second layer above the Bitcoin blockchain. This network allows people to make transactions with each other. The payment channels are set up directly and also indirectly between two users to ensure that the transactional processes are fast and seamless.
This protocol was developed to solve the Bitcoin’s scalability challenge by supporting quick peer-to-peer transactions through the movement of small and frequent transactions off-chain. Bitcoin can process just seven transactions per second. That speed is an issue since new users are now adopting the payment method daily. Moreover, the number of transactions being executed is constantly increasing.
Lightning Network Description
This network is an overlay system that was set up on the Bitcoin blockchain. It enables quick and private payments using payment channels. The off-chain payment solution can process millions of transactions with little or no fees at all.
The essential details and the cryptographic approvals of the transaction amounts are recorded entirely on the blockchain. Therefore, users can still benefit from the security features present on the Bitcoin blockchain. The Lightning Network is known to assists in eliminating traffic congestion that is present in Bitcoin blockchain while simultaneously providing more suitable transaction fees.
Lightning Network Operation
The Lightning Network is designed to act as an extra transaction network that uses special interconnected payment channels that are activated whenever the users connect to nodes. A payment channel acts as a private link between two users enabling them to make off-chain transactions. But, these transactions can only be made possible with the signature and consent of all parties.
Since the transactions are conducted outside the chain, the network can group a huge number of microtransactions and then send them into the Bitcoin chain as a single entry. Every user has a private key that offers access to the address of the channel.
The payment channels involved in the transactions can be closed by either of the transaction participants at any point in time. That is possible through broadcasting the latest balance sheet signed by the parties to the main Bitcoin network.
The channel is terminated after a transaction distributing funds into the accounts of the participating parties. A Lightning wallet or node is required to build a Lightning channel. Some of the widely accepted options include the Lightning app, Éclair, and Bluewallet that double up as wallets and also as Ind and C-lightning which are nodes.
A payment channel can then be created using the wallet or node with a unique code that is designed for use on one of them.
Who is the Developer?
This payment solution was introduced by Thaddeus Dryja and Joseph Poon. They launched it in 2015 with a white paper titled ‘The Bitcoin Lightning Network: Scalable Off-chain Instant Payments.’ However, this white paper has since undergone multiple review changes.
In the white paper, many details of the Lightning Network’s efficiencies and operations were published as a considerable solution to the scaling challenges posed in the underlying Bitcoin network.
ACINQ, Lightning Labs, and Blockstream are the main teams working on the development of the network. But, there is some input coming from other members of the community helping significantly in its growing process. For now, the Lightning Network is still being developed further with more features being added to it.
When will the Network be implemented?
The Lightning network is perceived to be a solution for the small-scale and large-scale transactions that can be made off-chain. When used correctly, it reduces the traffic on the main Bitcoin blockchain considerably. This network is also proven to lower transaction fees that are made via the Bitcoin blockchain and offers a dependable strategy of making fast payments.
The Lightning Network can fundamentally reduce the transaction completion time from roughly an hour to instantaneous. Moreover, the Lightning Network can potentially increase the capabilities of Bitcoin to billions of transactions per second. That is undoubtedly a major jump in its efficiency.
This Network is also known to have anti-fraud and security protection infrastructure integrated into it. The system makes it more challenging for the users to fall prey to thefts and frauds. The elimination of intermediaries makes it more beneficial for the payments to be made without any delays or approval.
Advantages of Lightning Network
The network comes with several benefits and drawbacks. Nonetheless, the benefits are more than the risks that are associated with the system. Some of the pros of the Lightning Network include:
- Instant payments – Payments made now using this network are instantaneous as a result of the Lightning Network that was previously unattainable. It was previously unattainable because users had to wait for a given confirmation period.
- Security and Privacy – the transactions made on this network are considerably secure as a result of the underlying Bitcoin blockchain and the fact that these transactions made are executed through payment channels that make them significantly hard to trace and less susceptible to hacks.
- Transaction Fees – the fees charged for each transaction on the network have been reduced. That makes it possible for micropayments to be made which was quite impossible in the past due to the high fees involved.
- Scalability – the Lightning Network makes it possible for billions of transactions to be processed every second. That majorly solves the challenge encountered by the underlying Bitcoin blockchain and makes it a problem of the past.
There is nothing that is perfect in this world and the Lightning Network is not an exception. Here are the main drawbacks:
- Transparency – the transparency of the entire setup drops on a per-transaction basis since the countless transactions are being executed every minute. Thus, the network will not work effectively with the regulation-compliant bodies.
- Online Necessity – The transactions made via the channels on the network may be possible through the use of an internet connection. Hence, the system cannot serve any of its purposes offline and needs both parties to be online for the transaction to complete.
- Centralization – A considerably small amount of centralization exists on the network as a result of its necessary node system. If the nodes eventually become the point of failure, it might affect any ongoing transactions.
Every innovation has its advantages and disadvantages. In the case of the Lightning Network that is still under development, it is true to say that the payment system still has some room for growth. It can even rise past its current limitations. Thus, the Lightning network is an excellent choice of a payment solution. It can cater to all users seeking to make micropayments with minimum charges and in minimal time.