At the very beginning of Bitcoin, no one had anticipated that the cryptocurrency will become such a prominent and notable technology and currency at the same time. Nonetheless, it was back in 2008, right after the start of this huge enterprise when one of the financial figures, James A. Donald, questioned the scalability of Bitcoin. It turns out that almost eleven years later the problem indeed occurs and there needs to be a solution fixed before Bitcoin starts competing with other currencies and other payment methods on the bigger scale.
But before we delve more into the Lightning Network and other related issues, it is very important for you to understand what scalability is all about and why it is so important. To put it simply, scalability is the potential of how many transactions that currency process per second. For example, when it comes to traditional payment methods, like Visa credit card, its capability ranges between 24000 transactions per second, and its peak is approximately near 50000 transactions per second. If we were to compare Visa to cryptocurrencies, we can notice huge difference. Bitcoin is capable of processing only 7 transactions per second. This gigantic gap made people think how to improve Bitcoin as transaction system.
For many years people were trying to figure that one issue out. Numbers of proposals were suggested. Some of them occur to be quite interesting and attractive to the investors and people connected with Bitcoin and cryptocurrency world in general. Although they were not implemented and they won’t be in the near future, there is one but quite significant solution that may actually become the real answer to the problem of scalability. This solution is called a Lightning Network.
Lightning Network — what is it?
If we were to compare the current state of Bitcoin to anything else in the world, we would say that nowadays it looks more like a sending a message through telegraph rather than texting a message via our phone. The whole process of sending transaction via Bitcoin payment system is time-consuming and it requires third parties to acknowledge the payment. In other word, it is a complex process that cannot take place without the participation of other people.
The basic idea behind Lightning Network is to create another layer to the technology of Blockchain (what is blockchain), enabling people to make transactions with the use of special channels that were created between two parties. The thing is that these channels do exist as long as it is needed and since there is no participation of third parties, there will be little payments or there will be no payments or fees at all.
Who is responsible for creating Lightning Network?
There were to people responsible for the idea of Lightning Network. The first concept of Lightning Network occurred in 2015 and it was proposed by Joseph Poon and Thaddeus Dryja. However, despite the fact that these two were the creators of the idea, Lightning Network is being developed by three independent teams that focus on other aspects. These teams are as follows: Blockstream, Lightning Labs, and ACINQ. What is more, the people from Bitcoin community are supporting the teams, providing the help in every way it is possible.
It is worth to mention that these teams are trying out different approaches, figuring out how to implement Lightning Network on three different programming languages. That is why it is uncertain whether this extra layer added to the blockchain will be written in C, in Golang, or in any other way. There is one more thing worth mentioning, and it is the fact that three the most popular and most developed implementations are compatible with each other. Thanks to that they can simultaneously work with one another.
Which cryptocurrencies can make use of Lightning Network?
Initially, Lightning Network was an idea prepared for Bitcoin and the major concepts of this project is created with the thought of Bitcoin and its blockchain. Nevertheless, it doesn’t mean that other cryptocurrencies, like for example Stellar, Litecoin, Ether, Zcash, or Ripple, won’t be able to make use of this network. The whole idea is to make Lightning Network not only accessible to all the clients and customers of Bitcoin (by making special applications and software that provide you with very quick and automated way of generating channels), but also to make it accessible for other authors, and hence giving other cryptocurrencies the chance to share Lightning Network.
How does it work?
Imagine the situation where a couple, friends, or any other group of colleagues want to transfer money without any fees, restrictions, and any other troubles. In order to transfer funds from one person to another with the use of Lightning Network, it is required for you as well as for the other person to set up a channel on the Lightning Network. However, to proceed with that, you have to have a multi-signature wallet. It means that both parties can enter the wallet provided they have got their own private keys.
Once the wallet is set up, both of them have to deposit a certain amount of Bitcoins into that. Once it is done, they will be able to perform transactions between the two of them without the slightest restriction. The whole process resembles more of a distribution of funds allocated at one place and not paying itself. However, in order to transfer the money finally and ultimately, they need to close the channel. Once it is done, the algorithm on which the channel is based on (essentially Lightning Network), will redistribute the right amount of Bitcoins.
So, how is this whole process directed into the Bitcoin blockchain, which is still essential for confirming the transfers? All the transactions that take place in the previously mentioned channel of Lightning Network is considered as a whole once it is closed. It means that it is not recorded and it is not in the official Blockchain until we close the channel and the proper amount of Bitcoins is redistributed. Because of that, there are no limitations of how much transactions one can make with another person. They will still count as one and work in almost instant way.
Obviously, this is how Lightning Network works now. However, ultimately the idea of hiding behind this project is to enable participants to be part of the Lightning Network without the need of creating individual channels. Nevertheless, we still have to remember about the fact that the use of channels will not provide the participants with the decentralized features Bitcoin is known for. As a result, the key transactions that involve larger amounts will still be carried out with the use of original, quite limited blockchain.
Can Lightning Network change the current situation of cryptocurrencies? Pros and Cons
Before we start describing the most beneficial aspects of using Lightning Network as well as its downsides, it is important to point out one particular thing. As you know, the whole idea is already 3 years old and although it has been developing for a long time now, it is still rather in its early steps provided how many changes there need to be implemented. That is why establishing our position on this particular item should take place after it is 100% ready and released.
What about the pros?
Certainly, we can include the following positives:
- The costs of transactions — or to put it in more appropriate words, the lack of costs! Nowadays every time we want to make a transaction, we are required to make a fee. This fee goes to all the people, who make use of their machines to confirm our transaction and to implement it to the blockchain.
- The speed of transactions — Once we set up the channel or, as it is predicted to work, we join the channel in an automated way, all the transactions are almost instant. It means that even if the network is extremely busy (as it happened many times before when people had to wait hours for the confirmation or even days), everything will proceed as planned, quickly and effectively.
- Scalability — The major problem of Bitcoin is to perform a huge number of transactions without any delays. Since there needs to be a confirmation for each and every transaction, the whole system is quite often overburdened. That is why the use of Lightning Network is said to increase the number of transactions per second up to 1 million! It would exceed the transaction per second capability of Visa or any other payment card by a dozen times!
- Security — while there have been some rumors that it won’t be safe using Lightning Network, one should remember about the fact that this technology provides you with the opportunity to become completely anonymous! Paying with the use of regular blockchain can be traced back, whereas all the transactions take place outside the main blockchain, making Lightning Network channels very safe for your anonymity.
- Functionality — At the same time it is very functional since the producers already proved that it is possible to carry out cross-blockchain transactions should these two blockchains have one characteristic attribute — they have the same cryptographic hash function. If you do not know, most of the popular and likable cryptocurrencies share it!
What about the cons?
When we talk about downsides of Lightning Network, we should draw our attention to such elements as:
- Unfinished project — although people can already make use of sophisticated applications and algorithms to carry out transactions with the use of Lightning Network, it is still a working progress. It means that there are some bugs and errors that may occur. In other words, the authors do not recommend using Lightning Network to operate with larger amounts.
- The complexity of channels — the whole idea may be simple from the point of view of this article. Nonetheless, it is difficult to predict what will happen when our payment will have to go through hundreds of channels. The fees may be even higher than in case of regular transactions.
- Restrictions of channels — although the whole idea is to lift the limits of transactions per second, there are some limits when it comes to the amount of Bitcoins that can be allocated into wallets owned by two parties. Of course this is the state of matters for this moment, and the authors claim that such issue will be taken care of. Nevertheless, we have to remember that at this moment, this setup restricts our possibilities.
- Nodes with huge capitals — since channels will overlap, there are concerns that there will be nodes with huge capitals, known as hubs. Through these hubs our payments will most often go through, creating a some kind of centralized-like system, what is an opposite of what Bitcoin claims to be.
Is this a good choice?
Right at this moment, it is impossible for everyday users to make transactions based on Lightning Network project. Only advanced users and testers, who have access to Lightning Network, can utilize this idea. That is why at this moment all we, the enthusiasts of instant Bitcoin payments can do, is to wait and see whether the programmers manage to live up to the task and create a fully operational, bug free system that allows everyday Joe to use micro-transactions in channels that were created with the use of above-described feature.
Of course, we should always remember that there are other concepts and other ideas, which are very similar to Lightning Network. One of the biggest competitions for this concept is Bitcoin Cash (BCH), which is constantly developing in a very rapid pace. That is why we shouldn’t wait with bated breath for Lightning Network to develop since there might be other solutions that occur to be faster and much more efficient than the one we just described.
Obviously, there is nothing standing on the way for different concepts to cooperate and work together. Or rather than cooperate, they can be entirely different ways of solving the issue of scalability.