Fast fact: Even if you and your friend transact 1000 times on lightning network, the main blockchain will only display the opening and closing transactions. All the transactions made on the off-chain (Lightning Network) are basically instant and feeless.
This article explains the lightning network in so simple words that even non-technical people can become experts…
What is Lightning Network?
The term lightning network itself is an explanation for its meaning.
In today’s world when everything is lightning fast like lightning-fast internet, lightning-fast payments, lightning-fast broadcasting, lightning-fast messages and much more but this is where Bitcoin lags while being the newest technology.
Means, Bitcoin isn’t that fast and it takes huge fees for its transactions. Many people believe that it is the future of our financial transaction system through which we can do day to day transactions. But scalability issue stands tall between these goals.
What is the Scalability issue of Bitcoin?
The scalability of Bitcoin has been a debatable issue for a long time in the crypto world.
If Bitcoin wants to be accepted as a daily transaction system and also, wants to compete with its competitors who already own the market with their fastest transaction systems then, it has to get rid of its scalability issue.
Its present competitor like Visa currently processes 4,000 transactions per second and can scale up to 65,000 transactions per sec.
While Bitcoin can only process 7 transactions per second with a block size of 1 MB, even if you pay high fees this figure can only reach up to two-digits which is still very lower than current modes of payments.
An increase in demand for Bitcoin transactions with time can overload its system which will lead to an increase in fees and hence no one would use it for regular transactions.
Currently, transactions take 10 minutes average time to get confirmed by miners even if you pay high fees. This issue is known as the scalability issue.
The issue of scalability was first identified by James A. Donald who mentioned it in a first public comment on the Bitcoin system.
Who created/founded the lightning network?
Thaddeus Dryja and Joseph Poon in 2015 introduced the idea of the lightning network in a white paper to make Bitcoin scalable without changing the block size. They enhanced Satoshi’s concept by adding their own advanced tech to it as an update.
The idea is to follow an off-chain approach which means small and everyday transactions don’t have to be recorded on the main blockchain. Instead, they can be stored on a second layer known as off-chain which will be totally user-generated. This approach will avoid the 7 tps limit.
Lightning network’s working?
Off-chain acts as a second layer above the main Bitcoin blockchain. The off-chain or the second layer process will enhance bitcoin’s capabilities so that customers can make instant and near to nil transactions through payment network channels.
In simple words, the lightning network involves covering up the Bitcoin blockchain with a second layer designed for micropayments. So, if Bitcoin is layer 1, the lightning network is layer two.
First, the parties who need to transact will have to set up a multi-signature wallet. The wallet address will be saved to the Bitcoin blockchain. This is how to form a payment network channel.
Opening the payment channel happens on the main blockchain to assure transparency to both the parties.
Suppose if you and your friend want to transact with each other then you both will require an off-chain payment channel on the Bitcoin blockchain as mentioned above.
In this multi-signature wallet, you both will then have to deposit some security amount which must be equal or higher to the value that has to be transacted.
On the payment channel, you can make unlimited number of transactions as long as you have balance left in your wallet. But all great stories come to an end too. Anyone of you can any time close the payment channel once its use is complete. Miners will then check the signatures on the balance sheets and then release the funds according to the balance sheet. The final transaction is then recorded on the main blockchain.
This is how the lightning network reduces the load on the main blockchain. In fact, it’s so safe that both parties will have the signed copies of the balance sheets as a record.
But what if you are transacting with an unknown person? Is this platform safe?
The amount that both the parties deposit as security is kept to prevent frauds too. It has an inbuilt anti-fraud mechanism. If someone tries to back out without settling original payment then the complete amount deposited will be transferred to another person as a penalty. So, amid these harsh penalties, there isn’t any chance to cheat.
When will the lightning network come to action? Where are we now?
Its release date was back in March 2018, when Lightning Labs (a California-based startup company) launched a beta version of its software. Developers are still exploring new boundaries to enhance its efficiency.
Currently, Blockstream, Lightning Labs and ACINQ are together developing the Lightning network. All these three teams are working in their own way in different programming languages for implementation of the lightning Network Protocol. Like, Blockstream works on language C, ACINQ works on Scala and Lightning Labs is working in Golang.
Not only Bitcoin but other cryptocurrencies are also trying to develop their platform using this technology like Ripple, Zcash, Litecoin (LTC) and Stellar (XLM).
Some Best Bitcoin Lightning Network wallets currently available are:
- Lightning app– Created by lightning labs for windows and Mac.
- Joule– A browser extension for BTC lightning network
- Blue wallet– Mobile wallet for android and iOS which gives users full control of funds
- Zap– Designed by jack mallers, it has a user-friendly interface.
- Casa Node– It is a hardware wallet.
- Breez – Mobile wallet which is fast and easy to use.
- HTLC– Created by Alex Bosworth. It is a web wallet that allows users to pay instantly.
- Éclair– Designed by ACINQ, made for android devices.
Some use cases of Lightning Network AltCoins:
- Ethereum’s Raiden
- ZCash’s BOLT
- NEO’s Trinity
Here is a video to explain you the lightning network with animation:
Lightning Network Stats:
Many think that the lightning network is ready to be used, but according to us it still has a long way to go till it becomes fully operational.
If Bitcoin is able to overcome its drawbacks which we talked about in this article then there is nothing to stop Bitcoin from being a tech to be used for day to day transactions worldwide. Bitcoin will surely replace card payments, cash payments and p2p transactions one day.
Bitfinex exchange announced in Dec 2019, that they will be using Lightning Network transactions.
Also hear it from a Bitcoin expert- Andreas Antonopoulos explains lightning network:
Many more use cases of this tech. are being awaited…