Blockchain has an unpleasant property: it inflates with the number of transactions (so-called blockchain bloating problem), because every single transaction that takes place in the Bitcoin network is stored forever in the blockchain. Each Bitcoin node must therefore hold and process all data on all transactions, so the Bitcoin network slows down, and transmission fees rise.
Many Bitcoin developers are trying to solve this problem by implementing additional layers over the base-layer blockchain. One of the most promising solutions is the Lightning Network.
The Lightning Network is a decentralized payment system for instant micropayments that maintains net neutrality and resistance to third parties. It is designed as a layer over Bitcoin’s blockchain and is basically a type of smart contract – a decentralized algorithm that allows counterparties to trade off bitchain transfers outside the blockchain.
Instant payments – Bitcoin combines transactions into blocks, every 10 minutes on average. The transaction is considered to be absolutely securely confirmed after the six blocks (confirmations) that follow (for about 1 hour). In the Lightning Network, payments do not require confirmation in blocks, they are instantaneous. This makes the Lightning Network a suitable solution for payment terminals.
Micropayments – The Lightning Network allows decentralized sending of micro-transactions in sizes smaller than 1 satoshi (one 100 millionth Bitcoin) with a flexible, almost negligible fee. A similar transaction would either not be possible on the Bitcoin blockchain or it would be too expensive.
Scalability – If Bitcoin is to become a successful global means of payment, it must support many more transactions per second (TPS) than can be done on the BTC blockchain. Lightning transactions take place outside the blockchain, and are able to increase network throughput multiple times, yet there is no need to use an intermediary to maintain the decentralization of the network.
Privacy – Although this is not its primary goal, the Lightning Network can increase the privacy of Bitcoin users because, unlike the blockchain, all transactions are not recorded in one large common ledger (like blockchain), but they only occur in channels. The only thing that gets written in blockchain is the final settlement upon the closing of channel.
How does Lightning Network work?
The means we want to pay with is stored in the so-called “Channel” between two sides. This channel is, basically, a Bitcoin address in which all transactions must be signed by two parties (multisignature).
This channel is represented as an inscription in Bitcoin’s public ledger. If we want to use funds in it, both parties must agree on the new status of their account. This status is recorded in the channel as a new transaction, confirmed by both parties, but nothing is written into the blockchain. The status of the channel can be arbitrarily changed after both sides have signed, with the old states being deleted and the last one always binding.
Only the resulting transaction, i.e. the final state of the funds, is written to the block. Some channels can only be created for a few payments, others can last active for years. Closing the channel does not require the consent of both parties. Each party has the option to close it separately, thereby terminating the payment relationship. If the Lightning Network expands, each network participant will have multiple channels with multiple counterparts at all times, allowing them to send payments to other network users.
Because payments are conditional on the knowledge of a secure cryptographic key (hash), they can pass through the network without the existence of an intermediary that would interfere with users’ funds. The Lightning Network thus makes it possible to keep Bitcoin decentralized.
How to try Lightning Network?
Lightning Network is still in the experimental phase, yet enthusiasts around the world are already using it. The number of people in the network is growing fast (check out the entire network, nodes and channels HERE).
If you want to try out Lightning Network, download Bitcoin’s wallets Bluewallet (for both Androind and iPhone), Eclair (for Google Play), Swift (for iOS) or Zap (desktop wallet). Micropayments through Lightning are accepted by Yalls.org, for example. Tech company Blockstream offers the opportunity to try out Lightning in practice by purchasing stickers.
Keep in mind, however, that this technology is not completely fine-tuned yet, so make sure that your payments are low-cost, so you don’t regret your loss.
Lightning – The Future of Bitcoin?
So, what will be the role of the base-layer blockchain if most transactions take place on other layers? Blockchain will always serve as the final, unchangeable inscription when opening and closing every channel. Large transactions will still be likely to be sent directly to the blockchain due to security. In the event of a dispute between counterparties, the blockchain also serves as the final arbiter, since closing the channel and block-blocking are critical to the state of counterparts’ accounts.
In addition to Lightning Network, other technologies are also being worked on to improve network scalability. Some improve the network on the base-layer blockchain (e.g. Taproot, SegWit, MAST, Schnorr Signatures,), others create additional layers, so-called sidechains (like Liquid), over the blockchain. But it’s other layers that the complex global network should build with. The Internet is scaled with a similar logic (by layers). Bitcoin should be scaled to maintain its core features on the base layer – security, decentralization, unstoppability. The scaling and other elements that Bitcoin wants to adopt should be moved primarily to the next layers. The greatest hope bitcoin developers are giving Lightning in the near future.
A part of the Bitcoin community does not believe that the Lightning Network will work, and they prefer to deal with the issue with fees and scaling Bitcoin by increasing the blocks. That’s why they split off the BTC network and founded Bitcoin Cash – read our article.
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