What is the Bitcoin Lightning Network?
Built as a second layer over the bitcoin network, it enables people to transfer Bitcoin between one another instantly and without any fees. This is made possible by creating payment channels between two users, and lightning can also make payments between users connected indirectly via network channels. Let us get into the schematics of one of bitcoins newest layer two features that will change the way we make payments and transact with one another in the digital age.
Bitcoin’s scalability issue
If you ever tried to send bitcoins to another person when the price was at an all-time high or in busy trading hours, you will quickly realize it may take up to ten minutes or days for the other party to receive their money when high fees get involved. That lack of speed requires more work on the backend, which means more cost for the transaction to be completed. The name of the game in decentralized money is speed; the faster you transact, the cheaper it will be. Visa can handle around 65,000 transactions per second, while Bitcoin can only handle seven transactions per second.
Bitcoin has this well-known issue of scalability of speed but do not count it out just yet. The lightning network is called a layer two solution in the bitcoin world. Think of bitcoin as a lego piece that can add additional elements to make it bigger and better. That is essentially what the lightning network has done to fix bitcoin’s scaling up to handle more transactions per second. Lightning allows scalability to process micropayments as Visa does instantly and freely. This is a massive improvement for bitcoin and the world of finance as a whole. This upgrade may make it possible to handle up to 1,000,000 transactions per second within multiple channels with the Lightning Network.
How does the lightning network work?
The network works through the use of payment channels. A payment channel allows users to make multiple Bitcoin transactions without committing all transactions to the Bitcoin blockchain. The bottleneck before lightning was integrated was the cause of bitcoins sluggish behavior. The blockchain was getting bogged down trying to transact payments while worrying about block size, hash rate, security, and validating transactions. Lightning has one job and one job only, which is to transact trades leaving bitcoin’s blockchain with one more minor task to do.
This is called an off-chain payment which means off the blockchain. By using a Lightning Network channel, both parties can transact without the friction of being on-chain. When contrasted to ordinary transactions on the Bitcoin blockchain, some transactions are handled differently. For instance, when two parties open and close a channel, they are only updated on the main blockchain, but now lightning is a great way to divert transactions off the main.
Parties can transfer funds between themselves indefinitely without telling the main blockchain. All transactions within a blockchain do not need to be approved by all nodes; this strategy substantially speeds up transaction times. Lightning Network nodes capable of routing transactions are formed by combining individual payment channels between the concerned parties into a type of contract. Whenever they want to close the channel, Any person can do it quickly.
Contracts are made with preset requirements that all participating parties agree to remove dishonesty once those requirements are met. The agreement automatically fulfills the contract without third-party involvement when a customer pays the correct amount for a coffee or a slice of pizza. Therefore, the Lightning Network results from many payment systems being linked together off the main blockchain and verified by its own nodes.
Lightning network implications
Lightning Network still struggles to solve the issue and even introduces various problems like low routing fees, malicious attacks, and regulation, although the chances are low. For example, the biggest issue with lightning is the small fees required to open and close a payment channel. On top of these small fees are routing fees that go toward nodes that are validating transactions.
To use the lightning network, you have to use a wallet compatible with the Lightning Network take advantage of it. While finding a wallet that works with the Lightning Network is easy, a user needs to fund it from a traditional Bitcoin wallet. That may pose some technical difficulty for some people, but plenty of Youtube videos and online tutorials are available. Offline transaction scams may become an increasing issue for lightning.
If one person in a payment channel chooses to close it while the other party is offline, the former party can steal the funds. When the latter party finally comes online, it’s too late to do anything, and the scammer can remain offline with no way to contact them. This may cause regulators to take action to make sure people are not being swindled out of their hard-earned money.
The whole premise of Bitcoin is to keep regulation to a minimum by utilizing permissionless transactions. Also, the Lightning Network does suffer from bugs such as stuck payments, which are outgoing transactions that don’t see verification. The Bitcoin network will refund a payment that is stuck, but it can take days to acquire, as valid transactions see more priority than stuck ones when it comes to verification. The good thing is the improvement will only get better and less buggy. The Lightning Development Kit (LDK) is a flexible Lightning implementation geared towards developers who want to frictionlessly integrate Bitcoin’s Lightning Network into their applications. Places like El Salvador, where bitcoin is considered legal tender, use lightning every day to bolster the technology and make it even more user-friendly in the future.
