The Lighting Network — A Hero We All Need
Lately, the Lightning Network concept attracted big attention as the next growth solution for Bitcoin (and other crypto-currencies). This article aims to give an explanation of the Lightning Network concept, how it works, and how it will affect the industry.
The Lightning Network is part of what is known as a “Second Layer Solution”. This means a solution that comes on top of an existing blockchain, without having to make any changes, and allows an improvement of the existing blockchain.
In simple words, the Lightning Network aims to enable instant transactions at a small to no fee, all fully secured by cryptography.
Before we explain how the Lightning Network works, we must first understand the solution of which it is based on ,“Payment Channels”.
Apayment channel is a “channel”, just like some type of chat, in which messages are transmitted between two users willing to make transactions with each other. In order to open a payment channel, each participant must make a deposit on to the network, in order to prove that he/she will actually transfer the payment to which they have commit to.
After the initial deposit, the parties can transfer transactions between them without the need to send them to the blockchain.
As an analogy, you can think of it as a transfer of signed checks, each one of the parties can go to make a deposit in the bank but as long as you still do business together, there is no need to go to the bank which takes a lot of time and requires paying a commission.
Only there is another third, final stage, which occurs once the the parties have completed the exchange of messages. On this stage, it is required to send a message with the final state to the blockchain, which summarizes the final state of the payment channel.
For example, if a grocery store’s owner and myself opens a payment channel, where I initially deposit 10 bitcoins. Thereafter every purchase that I make from the grocery store will be deposited from the initial balance. Let’s say that at the end of the month the owner wants to receive the actual payment to start using it on the chain, the transfers I made to him consist of 3 transactions of 1, 0.3, 1.7 bitcoin. When the seller closes the payment channel, he will send a message to the blockchain proving he received from 3 bitcoin from myself, which will transfer 3 bitcoins from the initial deposited amount (10) and return the remaining 7 to my account. So instead of making a call to the blockchain for each transaction, I sent only two calls to the blockchain. This allows an unlimited number of transfers to be made in between immediately and without a fee.
The Lightning Network is a network that consists of many payment channels. The advantage of this network is it allows payments to be made through mutual peers you are both connected to. Here is another example — let’s say I want to transfer a payment to my neighbor John, but don’t have an open channel with him. Instead of opening a new channel with John, and thereby locking my money and paying commissions, I can send him a payment through a grocery seller, which we both have an open channel with. Each station is called a node. The biggest advantage of this network is that the more participants on the network, the more connections there are, which may reduce or almost eliminate the need to close channels. You can think of this in a checking account from which you can send and receive payments quickly and with almost no fee.
The problem is that in order to send transactions between channels, each of the participants (the payer and each node which it passes through) must have a deposit with at least the amount transferred to the other party, which limits the channels in which transfers can be made. The solution is establishing centers called Hubs, where very high amounts will be deposited to open multiple channels for a large number of users. The incentive for establishing such a hub is the fees he can demand to make a transfer through him. This means that there are still commissions, but they are significantly lower because there is a competition between the different hubs.
There are people who claim the LN will lead Bitcoin to be centralized since it uses big hubs as a part of the solution. I believe their claims are wrong for a few reasons: first of all, it is important to remember that this is a second layer solution. It doesn’t really matter how people choose to use their bitcoin as long as the protocol itself is not compromised in terms of security and decentralization. Secondly, there is no need to trust these hubs as it is cryptographically proven they cannot cheat the system, so even if there are some key points to the network, there is no need to trust them. The third thing is you need to think about it as a service, the hub locks its own money and lets you use it to make transfers, you don’t have to use this service but it’s better for you to do so. The hubs offer you a service that stores value (not doing anything with the money is like losing the interest they could earn from it) and in return, expects to profit from it. In short, the network continues to be decentralized and trustless, but with an improved addition — quick and inexpensive transfers.
About three months ago, the first Lightning Network was deployed to the Bitcoin main network, and it continues to grow and expand. I believe that by the end of 2018 the lighting network will become a major part of the use of blockchain, and will be the beginning of the daily use of payments in the blockchain.
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This guest article was written by Ben Kaufman, founder of BitCampus.io
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