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The initial popularity of blockchain technology was fueled by its decentralized nature. The traditional way of exchanging currency on-line always includes a third party. A bank is needed to ensure that the transaction is correct and that the sender has the money to send. In a distributed ledger, a central party is not needed at all – double-spend is ensured by the blockchain. Another factor that triggered popularity is the idea of money that is not controlled by any government, but by the people.
Blockchain lets us run a public record of transactions which ensures the legitimacy of all transactions and the rules are implemented from the very start through the technology itself and the smart contracts they use. Still, it is not without its limits.
The two most popular currencies that use blockchain, Ethereum and Bitcoin, suffer from the same problem. They lack scalability. Due to the massive popularity of Bitcoin cryptocurrency, the number of transactions has skyrocketed and issues have become apparent.
The time to complete a transaction went as high as 78 minutes per transaction and the fees went as high as $50. These kinds of limitations are present with many of the cryptocurrencies. Therefore solutions are needed. For Ethereum it is Sharding, for Bitcoin – Lightning Network.
What is Lightning Network and how does it work?
The main advantage of using the Lightning Network is the speed and cost of the transaction. Due to the fact that 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. The Lightning Network can essentially cut down the transaction completion time from somewhere around an hour to instantaneous.
The Lightning Network can potentially raise the capabilities of Bitcoin to billions of transactions per second which is a huge jump in efficiency. Here’s the best video to explain this simple:
What happens with Bitcoin blockchain after Lightning?
Nothing – it will operate as it used to. It will continue to be reliable, trusted, and distributed. The Bitcoin network will record transactions either coming from Lightning or direct. Due to the fact that direct transactions to Bitcoin chain are slower (compared to Lightning) and more costly, it will mostly be used for large transfers. In the same way the aggregated transactions from the Bitcoin Lightning Network will be sent to the main chain as in bulk – one big transaction.[/responsivevoice]
Article prepared in collaboration with HODL Finance, the European digital lending company. HODL Finance issues loans backed by cryptocurrency and other digital assets. Founded by the shareholders of the peer-to-peer lending platform, Savy, HODL Finance now serves clients around the world.