The Lightning Network (LN) was created as a concept by Joseph Boon and Thaddeus Freija in 2015. The main idea behind the project is to design a payment protocol that can be used as a solution to the scaling problem faced by the Bitcoin blockchain, but this concept may be applied to currencies. Other digital too.
The premise of the Lightning Network was taken due to the limitations faced by Bitcoin and many other digital currencies. Currently, the Bitcoin blockchain is able to complete from 2 to 7 transactions per second (TPS), and with the growth of the cryptocurrency system and more people joining the network, the number of transactions transmitted to the blockchain also increases. As the network becomes more congested, the overall performance decreases, which greatly reduces the practical usability of Bitcoin as a global digital currency. That’s why the LN was created as an attempt to alleviate the congestion of the Bitcoin blockchain network.
How it works?
The Lightning Network consists of an external transport network that is built on top of the Bitcoin blockchain. The system works on a peer-to-peer (P2P) level and its ease of use depends on the creation of so-called two-way payment channels through which users can perform continuous cryptocurrency transactions.
After both parties decide to open a payment channel, they can transfer funds back and forth via their wallets. Although the process of creating a new payment channel involves a chain transaction, all transactions within the channel are off-chain and do not require global compliance. Therefore, these transactions can be executed quickly with a smart contract and incur much lower fees and a much higher transaction per second (TPS) rate.
To open a payment channel, the two parties involved need to create a multi-signature wallet and add some funds to it. Funds stored in multi-signature wallets can only be accessed if private keys are provided to both parties (two or more, depending on the case).
This means that one party cannot open the wallet without the consent of the other party.
For example, let’s imagine Alice wants to use the Lightning Network to exchange Bitcoins with Bob. First, they set up a payment channel using a multi-signature wallet. While the payment channel works like a smart contract, a multi-signature wallet works like a safe where the funds that are traded in are deposited. Throughout the life of the payment channel, Alice and Bob can make as many off-chain transactions as they want.
Alice and Bob both sign and update their own version of the balance sheet right after each transaction which records the amount of coins for each one. When their transactions are finished, they can close the payment channel and broadcast the final budget to the Bitcoin blockchain. The Lightning Network smart contract will ensure that they get their bitcoins according to the latest release of the balance sheet.
In short, interested parties only need to interact twice with the Bitcoin blockchain. Once to open the payment channel again to close it, which means that all other transactions that take place within the channel do not interact directly with the main chain.
Network routing
Even if both parties do not have a direct payment channel, they will still be able to send and receive bitcoins through interconnected payment channels. This means Alice is able to send payments to Charlie without having to create a direct channel with him. As long as there is a network path between them that has enough balance. So if Alice has an open payment channel with Bob, and Bob has a payment channel with Charlie, she can send the payment through Bob.
Payment routing may include multiple Lightning Network nodes but the smart contract will automatically search for the shortest path available.
Advantages of the Lightning Network
- Pay as you go, the lightning network payment speed can reach a millisecond, so that the payment can be completed quickly. It uses smart blockchain contracts to ensure security, and it no longer offers the blockchain transaction per payment, thus increasing the speed of the transaction;
- Good scalability, it can process more than millions of transactions per second, and the payment can be completed without custody;
- Low Processing Fees, Lightning Network takes place through off-chain transactions, and only requires very low transaction fees, making instant payouts possible;
Lightning network limitations
- Lightning network payments cannot be completed if the recipient is not connected to the network.
- Network participants may need to monitor payment channels regularly to maintain their balances (such risks can be overcome with outside monitoring services).
- The lightning network is not suitable for large payments because the network includes many multi-signature wallets (which are shared wallets) so there is a high probability that these accounts will not have enough balance to act as a middleman in large payments.
- Opening and closing a payment channel includes a chain transaction that usually requires high manual labor and transaction fees.
When is the lightning net applied?
If we take into account the beta version of the mainnet announced by Lightning Labs, the release date of the Lightning Network was March 15, 2018, however the official release has not yet come because it has not been effectively implemented on top of the Bitcoin blockchain.
Since the beta release there has been a significant increase in the number of Lightning Network nodes and payment channels. As of November 2018, Grafana has reported over 12,500 payment channels.
The teamwork of nodes and payment channels is what makes the Lightning Network an interesting solution to the scaling problem. The beta version has gone through a lot of trials and has yet to be proven effective. However, the lightning network has huge potential to improve the bitcoin and cryptocurrency system.