When Lightning Strikes: Understanding the Lightning Network

Apr 3, 2019 · 5 min read

The Lightning Network (LN) is marking a year since it went live on the Bitcoin network. Developed by California-based blockchain startup Lightning Labs, LN is designed to help SegWit-enabled digital currencies scale more effectively through the use of off-chain transactions.

In this article, you will learn what the Lightning Network is, how it works, and what implications the upgrade holds for Bitcoin as well as the rest of the cryptocurrency sector.

The Genesis

The Lightning Network started out as a BIP (Bitcoin Improvement Proposal) in 2015. Following in-depth research, computer scientists Joseph Poon and Thaddeus Dryja, published a whitepaper detailing a proposal for a scaling solution, especially for the Bitcoin network, in 2016.

At the time, the cryptocurrency sector was reeling from the effects of increased interest from the mainstream. A combination of factors had attracted a large number of new users to the sector. As a result, many within the space were considering how scalable the Bitcoin network was and how it could continue to be in the future.

The bitcoin community was engaged in a heated debate over the best way to scale the network. The debate raged between the merits of on-chain and off-chain solutions. On-chain solutions require changes to be made to the specifications which governed the Bitcoin ledger. One of the more popular notions for on-chain scaling was increasing block size. Proponents believed this would allow for a greater number to be included per block which would then lead to greater throughput. However, opponents believed an increase in the block size would eventually result in centralization. Additionally, many believed it was too risky to effect such a drastic and largely untested change on the Bitcoin network.

Therefore, for many, off-chain solutions were a better solution. Eventually, the bitcoin community implemented SegWit on the network. Segregated Witness (SegWit) is an upgrade to the software underlying Bitcoin. It changed the way data was stored on the network. By negating the need for all transaction data to be stored on a block, then the block was able to accommodate more transactions. Additionally, the implementation of SegWit made it possible for other scaling solutions to be implemented on the network.

The Lightning Network, for instance, is only applicable to the Bitcoin network because of the implementation of SegWit.

Lightning Labs, the developers behind the protocol, believed the protocol would induce the desired effect on the ledger without compromising the security of the network stating:

“It is instead preferable to only have the bare minimum of information on the blockchain. By deferring telling the entire world about every transaction, doing net settlement of their relationship at a later date enables Bitcoin users to conduct many transactions without bloating up the blockchain or creating trust in a centralized counterparty. An effectively trustless structure can be achieved by using time locks as a component to global consensus.”

In a paper called ‘The Bitcoin Lightning Network: Scalable Off-Chain Instant Payments’, Poon and Dryja described a scaling solution which involved transactions that would be recorded off-chain. The developers explained:

“Creating a network of micropayment channels enables bitcoin scalability, micropayments down to the satoshi (0.00000001 Bitcoins), and near-instant transactions. These channels represent real Bitcoin transactions, using the Bitcoin scripting opcodes to enable the transfer of funds without risk of counterparty theft, especially with long-term miner risk mitigations.”

The micropayment channels help users transfer value almost instantaneously. To interact in this way, users must initiate a channel and the associated wallet addresses. The two parties must then agree on a minimum amount which they then both contribute. These funds are then stored in the channel and are what facilitate the instantaneous movement of funds between the parties.

The micropayment channels are designed to reduce the demands on a blockchain. The protocol is designed to record only the initial and last amounts held in the channel. The parties who created the channel can transact an unlimited number of times between each other. However, the ledger does not store all this information. Instead, this information is stored on the Lightning Network, which is a second layer infrastructure built atop the blockchain. The channels can be opened and closed at will by the parties involved.

Community Adoption

Prior to the release of the Lightning Network Daemon (lnd) and its subsequent implementation on the Bitcoin network, there were worries about the proposed update as well as whether the upgrade would actually function how its developers envisioned. However, developers maintained that the update would help facilitate low-value transactions on the network such as those necessary for paying merchants for good and services.

However, shortly after its implementations, the network continued to grow. According to data published by IML, a search and analysis Engine dedicated to the Lightning Network, the total capacity for the LN continues to grow.

The side chain has 7,488 nodes and 39,341 unique channels. Additionally, the network now has a total capacity of 1,065.83 BTC which at current market conditions equals to $4,286,947.02. The network is showcasing exponential growth as it had reached the 500 BTC mark only towards the end of 2018 and has now doubled in value.

The Bitcoin Lightning Network marked its first year anniversary mid-March 2019. Additionally, altcoins such as GroestlCoin, Syscoin, Vertcoin, and Litecoin have also started to support LN on their ledgers. Litecoin was the first digital currency to implement the scaling solution and its successful implementation on the altcoin paved the way for its addition to the Bitcoin network.

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CentrumCoin, the bridge between individual investors, entrepreneurs and the cryptocurrency market.


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CentrumCoin, the bridge between individual investors, entrepreneurs and the cryptocurrency market. centrumcoin.com


CentrumCoin, the bridge between individual investors, entrepreneurs and the cryptocurrency market.

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