I n 2009 Bitcoin hit the market, it was considered as a new class of money. But as people started using Bitcoin and it started gaining popularity, the network became slower and more expensive; now, high fees have effectively priced out less costly uses of Bitcoin like buying groceries. Over the last few years, the developer community has taken out a couple of solutions to resolve this problem and one of them being the Lightning Network.
Hailed as one of the most potent solutions to cryptocurrency scaling currently under development, the lightning network effectively creates a layer on top of bitcoin, enabling fast and cheap transactions which can net settle to the bitcoin blockchain.
Scalable, Instant Blockchain Transactions
The latest version of the technology is meant to create cryptocurrency payments faster & cheaper. Once it is employed across all nodes, then this system will speed up the transaction process and decrease their associated expenses on bitcoin’s blockchain.
It will be the first ever Layer 2 solution that is built on top of Bitcoin blockchain that allows people send/receive payments instantaneously and reduce transaction fees by keeping them off the main network.
The basic principle of the Lightning Network is that not every single transaction needs to be broadcast to the entire network, especially small ones.
Procedure Involved In the Background
First, two people who want to transact with each other put up a multi-signature wallet. This wallet holds some bitcoin. The wallet address is then saved to the bitcoin blockchain. This sets up the payment channel.
The two parties can now carry out the limitless number of transactions without ever touching the information stored on the blockchain. With every transaction, both parties mark an updated balance sheet to constantly reflect how much of the bitcoins stored in the wallet belongs to each.
When the two parties have done transacting, they close out the channel, and the resulting balance is registered on the blockchain. In the event of an argument, both parties can use the most recently signed balance sheet to recover their share of the wallet.
It is useful to note that it is not necessary to set up a direct channel to transact on lightning – you can send payments to someone via channels with people that you are connected with.
Development of the technology got a noteworthy boost with the implementation of SegWit on the bitcoin and litecoin networks. Without the upgrade’s transaction flexibility fix, transactions on the lightning network would have been too hazardous to be practical.
Without the security of the blockchain, the lightning network will not be as secure, which clears that it will mostly be used for small or even micro transactions which bear a lower risk. Larger transfers that need decentralized security are more expected to be done on the original layer.
There are many transactions that happen on these exchanges every minute, even independently, which the entire Bitcoin network can handle. Because of these attributes, there are no viable alternative for securing these high volume exchanges & payment services that utilizes Bitcoin’s security model. This is where the lightning network can be a game changer.
- Small-scale payments are possible: Since fees are proportional to the payment amount, you can pay a fraction of a cent; accounting is even done in thousandths of a Satoshi.
- Payments are settled right away: The money is sent in the time it takes to cross the network to your destination and back, usually a fraction of a second.
- Better privacy: Not every transaction is stored on the public blockchain, only once when the payment channel is ultimately closed and the balance is paid out to both parties
- Peer failures: If one of the peers is unresponsive, users might have to wait for hours to lock a payment channel and resend the funds via a different route
- No Offline Payments: Users can’t pay someone who is not online
- Not ideal for large payments: Even though a route via various payment channels might exist, the funds in the peers multi-signature wallets might not be enough to transfer large funds
- Centralization: The Lightning Network might support centralization in payment hubs
The Bottom Line
Even though it was at first designed for bitcoin, the technology is at present being developed for a range of cryptocurrencies, such as litecoin, stellar, zcash, ether, and ripple. Litecoin plans to launch its version at the same time as bitcoin’s.
It’s a promising model that will make a remarkable difference to bitcoin’s blockchain. Given the difficulty of the code and the need for meticulous, developers are urging patience. In addition, lightning can’t be implemented at scale until SegWit is more widely extended, while some believe that there is enough SegWit support to run the network on mainnet now, others predict that a working lightning network could be at least a year away.