How the Lightning Network is already changing the world.
First, I’ll have to say that I’m still learning about all the technical details that makes the Lightning Network (LN) what it currently is. All the intricacies and all the continuous changes are something that I find difficulty in keeping up with. This is obviously because the LN is changing so fast that if you blink, you’ll miss it. So I’ll be talking about this from a high level view and not a very technical one.
The Lightning Network has been with us since 2017 (it existed before, but on a test network), so it’s pretty new stuff if you think about it from a perspective of how long other alternatives like Western Union and Visa have existed.
The revolutionary aspect of this one in particular is that the LN allows for peer-to-peer payments all over the world without any intermediaries and without borders (it has never known what countries/borders are and it never will), and those payments are nearly instant and nearly cost-free. This new tool that we as humans have created will allow everything from a person wanting to send an amount of his salary to his/her family in other country, and avoid the cost of intermediation that other networks impose, to a situation where someone wants to play a game or watch an streaming service and pay by the second. This is an amazing improvement to be honest, the LN is the first network that allows micro-payments thanks to its virtually instant transfer of value and its near-zero, or sometimes zero, cost of transfer.
If you are wondering how all of this works, I’ll tell you how in a synthesized way, but I’ll also link a video at the end of this post that will explain it from a much more technical point of view with animations that will help you understand all of its complexity.
First, the Lightning Network is a layer built on top of, or alongside Bitcoin (the protocol), not a side chain, not its own blockchain, not anything like that. It’s a second layer that emanates from Bitcoin’s blockchain, and uses its security and consensus rules to allow the exchange of value (in bitcoin) between two peers. It currently works with Litecoin too, and work is being done to also include some stablecoins like USDT with the possibility that in the future others may join the party.
Here, I want to make a clear distinction between Bitcoin (a protocol for a decentralized peer-to-peer network that creates consensus without needing a central authority to provide trust) and ‘bitcoin’ without the capital ‘B’ (the currency or token issued as a reward in the Proof of Work mining process).
The Lightning Network allows for payment channels to be created in order to fulfill its purpose. A payment channel is what’s technically known as a “2-of-2 multi-sig address”. That is to say, that a channel is an agreement between two peers that sign a transaction together to create this address (the channel itself). It works as if you and me decided to create kind of a local network that would only include ourselves and use it to exchange value between us.
This, fortunately, is not the only use that the Lightning Network has, because if it only worked that way, everyone would need to have a channel with everyone else to exchange bitcoin, and if that were the case… Well, you can imagine the limitations to succeed in getting onboard all the ~8 billion people in this planet.
The basic use for the LN is to be able to create those channels with whoever you want to, but what if I want to exchange value with more than a hundred people? Do I have to create more than a hundred channels? No. Absolutely not.
There is a feature that the LN has that is called ‘routing’, which means that you can route payments from point A to point B without the need to open a new channel with everyone you want to transact with, but only if you have other channels in common with the other peer you are sending bitcoin to. That is to say that if my name is Alice and I want to send some bitcoin to Eric, I don’t necessarily need to create a new channel with him if I already have channels with people that has channels with Eric. Here’s an image to illustrate the concept:
This is called ‘pathfinding’ and it obviously makes things harder for payments to succeed and work in a flawless way, but there are solutions to this problem already (shown in the video at the end of the post) and this is the way the Lightning Network is currently working.
Now, there’s another downside to the Lightning Network’s channel aspect, and that is that channels have to be online 24/7 in order to remain active and usable. If a channel goes offline, that is the same thing as closing the channel, and all the funds would be distributed as the latest signed transaction points they are to be, and the channel would cease to exist. So, to solve this problem, there are hundreds of thousands of nodes around the world already and many of them are always online. Also, now wallet-provider companies are starting to be the ones who are hosting these channels for you, so you don’t have to remain online constantly with your phone or computer where you have your LN wallet (in the Lightning Network a wallet is a node, and a node is a channel).This is helpful because it would be impossible to ask someone to not close its mobile app forever, which makes zero sense, that’s why already these service providers are doing it for you.
So, where does this leave us? Well, there’s still many more situations that I have left out involving how the LN really works, and there’s also more problems being worked on to solve this limiting capacity to get onboard all the population in the planet on this marvelous technology that we humans have developed, and that for sure will make a great impact on how micro-payments and regular payments are settled around the world on a daily basis.
I’ll leave you with some of these current problems that we are facing which are mentioned on this great Twitter thread by John Cantrell so you can understand those better and also see if you have some ideas to contribute in solving them.
Also, as I promised earlier, I’ll leave here a link to a video that explains the current state of the Lightning Network good enough with some visualizations so you can get a better grasp on how all of this new tech works. Maybe I will post an update when I have more knowledge on this topic.
But I sincerely hope that after reading this post and watching the video, you’ll feel like this isn’t just enough to claim that you know what the LN really is, and out of curiosity you’ll want to look even further into it, learn even more about it and try to help it by eventually running your own nodes and even participate in this fun problem-solving process that the LN needs to sort out.