What is Lightning Network

Primarily, Bitcoin was not designed to face scalability issues. It was rather created to be a better alternative to centralized payment systems like banks and insurance companies with its decentralized nature and easy accessibility. But as its popularity grew within the world of finance, which means an increasing number of users in the system, transactions became slower and more costly than previously intended, hence the need for developers to design Bitcoin to be scalable. Developers, in a bid to solve the problem, created cryptocurrency layers: primary, secondary, tertiary layers and so forth. These layers are built in such a way that they complement as well add functionality to one another.

Understanding the Lightning Network

The Lightning Network is Bitcoin’s second layer that uses micropayment channels to solve the problem of transaction speed and throughput on the Bitcoin blockchain. It was a technological solution first proposed on paper by Joseph Poon and Thaddeus Dryja in 2016 and has been under development ever since.

A Lightning Network Channel uses multiple payment channels to moderate transactions between parties or Bitcoin users. Using these channels, the parties can receive or make payments from each other. The Lightning Network allows them to conduct these transactions on a faster, less costly, and more readily validated environment as compared to those conducted directly on the Bitcoin blockchain. It can also be used for off-chain transactions involving exchanges between cryptocurrencies.

What Are the Benefits of the Lightning Network?

As previously stated, Bitcoin was not designed to withstand the number of transactions that’s currently being run on it hence the need for a network that attempts to solve the problems.

Speed in Confirming Transactions

Since more users are now transacting on the Bitcoin blockchain, transactions have become time-consuming and expensive, thereby doubling the mining difficulty over time. The Lightning Network allows for increase in the number of transactions and improvement in the manner in which transactions are validated.

Reduced Energy Requirements

More users mean more information. And the energy necessary to compute this information is unusually enormous, thereby leading to high cost of maintenance of the Bitcoin blockchain. Using the Lightning Network, users do not have to worry about such a prohibitively expensive cost for maintenance.

Efficient Smart Contracts and Multi-Signature Scripts

Smart contracts and multi-signature scripts are the backbones of the Lightning Network. Both are used to make sure that funds sent through the channels make it to the pre-established recipient.

Concerns About the Lightning Network

One major concern about the Lightning Network rises from the fact that, despite its decentralized nature, it could lead to a replication of the hub-and-spoke model characterizing the current model of financial systems. Such that businesses investing in Lightning may become centralized due to more open connections with others. Others include price volatility, fraud and high fees.

Fraud

Using the Lightning Network, one major risk to be wary of is a party closing the channel and going offline. For example, suppose Ken and Emma are transacting, and one of them has dubious intent. The ‘dubious’ party may be able to steal coins from the other party by closing the channel and going offline. That’s why it’s important for third parties to run on nodes that monitor the transactions and prevent fraudulent channel closure.

Fees

Like all payment channels, the Lightning Network charges transaction fees. They are the summative calculation of charges for opening and closing channels, Bitcoin’s transaction fees, and others. As businesses begin to adopt the Lightning Network as a payment system, transaction fees could increase. Since the transactions are often overseen by third parties, they may charge fees for the service.

Malicious Attacks and Hacks

Two major risks to the Lightning Network is its vulnerability to hacks and congestion caused by a malicious attack. Congestion of the payment channel can affect the gateway, such that the users might not be able to get back their money as fast as they should. In worst cases, attackers can freeze the payment system and steal funds from involved parties.

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