What Is Lightning Network?

 Scalability is still the biggest problem for Bitcoin since it was first proposed in 2008, which means it has only been capable of processing around 7 transactions per second, far less than traditional financial systems. Meanwhile, waiting for 6 blocks' validation takes about 1hour to confirm transition. One of the proposed solutions to solve the scalability of Bitcoin is Lightning Network, which was proposed by Joseph Poon and Thaddeus Dryja in February 2015.

What Is Lightning Network?

The Lightning Network is a "layer 2" payment protocol designed to be layered on top of a Bitcoin network, which makes transactions be done between parties off of the blockchain(off-chain transaction). Generally, Bitcoin transactions are on-chain transactions that using blockchain technology. They are essentially a shared database in which its distributed ledger allows participants to see all of the transactions that have been recorded. On the contrary, the Lightning Network adds another layer to Bitcoin's blockchain and enables users to create payment channels between any two parties on that extra layer without broadcasting those to the blockchain. Because they're set up between two parties, transactions will be almost instant and the fees will be extremely low.

What Does the Lightning Network Do?

The Lightning Network is dependent upon the underlying technology of the blockchain. By using real Bitcoin/blockchain transactions and using its native smart-contract scripting language, it is possible to create a secure network of participants who are able to transact at high volume and high speed.

  • Bidirectional Payment Channels. Two participants create a ledger entry on the blockchain which requires both participants to sign off on any spending of funds. Both parties create transactions that the ledger entry to their individual allocation, but do not broadcast them to the blockchain. They can update their individual allocations for the ledger entry by creating many transactions spending from the current ledger entry output. Only the most recent version is valid, which is enforced by blockchain-parsable smart-contract scripting. This entry can be closed out at any time by either party without any trust or custodianship by broadcasting the most recent version to the blockchain.
  • Lightning Network. By creating a network of these two-party ledger entries, it is possible to find a path across the network similar to routing packets on the internet. The nodes along the path are not trusted, as the payment is enforced using a script that the atomicity (either the entire payment succeeds or fails) via decrementing time-locks.
  • Blockchain as Arbiter. As a result, it is possible to conduct transactions off-blockchain without limitations. Transactions can be made off-chain with confidence of on-blockchain enforceability. This is similar to how one makes many legal contracts with others, but one does not go to court every time a contract is made. By making the transactions and scripts parsable, the smart contract can be enforced on blockchain. Only in the event of non-cooperation is the court involved – but with the blockchain, the result is deterministic.

Is Lightning Network Only for Bitcoin?

Originally, it was designed specifically for Bitcoin, but the technology is currently being developed for an array of other cryptocurrencies, such as Stellar, Litecoin, Zcash, Ether, and Ripple.

What are the benefits of using the Lightning Network?

  • Instant Payments. Lightning-fast blockchain payments without worrying about block confirmation times. Security is enforced by blockchain smart contracts without creating an on-blockchain transaction for individual payments. Payment speed is measured in milliseconds to seconds.
  • Scalability. Capable of millions to billions of transactions per second across the network. Capacity blows away legacy payment rails by many orders of magnitude. Attaching payment per action/click is now possible without custodians.
  • Low Cost. By transacting and settling off-blockchain, the Lightning Network allows for exceptionally low fees, which allows for emerging use cases such as instant micropayments.
  • Cross Blockchains. Cross-chain atomic swaps can occur off-chain instantly with heterogeneous blockchain consensus rules. So long as the chains can support the same cryptographic hash function, it is possible to make transactions across blockchains without trust in 3rd party custodians.

What Are the Problems With Bitcoin's Lightning Network?

  • Transaction Fee Problem. Open and close channels between parties will be charged. Also, there is a separate routing fee to transfer payments between channels.
  • Security. Remaining online at all times makes nodes susceptible.
  • Not fully operational. Lightning Network at the moment is not fully operational yet, so there's no way of fully judge how good it actually is.

How Do I Use Lightning Network?

The lightning network is currently in the early stages, it is only available for live public tests. You can use the Lightning Network on the Bitcoin testnet by download the client.

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