Bitcoin’s scaling problem needs a solution. Enter: the Lightning Network.
Today, there are more than 300,000 Bitcoin transactions on average every day — a massive increase — resulting in higher fees and slower transactions. At its current state, Bitcoin has a scaling problem. But what’s the solution? Enter: the Lightning Network.
When Satoshi Nakamoto first introduced Bitcoin in 2009, it was designed to be a peer-to-peer electronic cash system, meaning that payments would be quickly handled, without the need for a third party. However, as Bitcoin and cryptocurrencies, in general, grew in popularity, so too did network usage and congestion.
Today, there are more than 300,000 Bitcoin transactions on average every day — a massive increase from the earliest days of the Bitcoin network. While that’s good news for adoption enthusiasts, the increased traffic means users are having to wait longer for transaction confirmations and are paying higher fees for doing so.
At its current state, Bitcoin has a scaling problem. But what’s the solution? Enter: the Lightning Network.
What is the Lightning Network?
The Lightning Network is a scaling solution for Bitcoin originally proposed by Joseph Poon and Thaddeus Dryja in 2015, though there are currently many developers in the community working on it (the current whitepaper can be found here).
Essentially, the two proposed a way of increasing the efficiency of Bitcoin transactions by creating another layer for the network that would run atop the Bitcoin blockchain. This new layer creates specific payment channels off-chain between parties where transactions will be recorded without the need for recording every small transaction on the Bitcoin blockchain itself.
Instead, this new layer allows users to connect and transfer BTC off-chain without needing to wait on network confirmations and high transaction fees. With the implementation of the Lightning Network, users can expect significantly faster transaction speeds as the world’s largest cryptocurrency goes from handling a meager 7 transactions per second to potentially “millions to billions of transactions per second across the network” — here’s how it works.
How Does it Work?
The basis of the Lightning Network is a large network of bidirectional payment channels, the ones that operate atop the existing Bitcoin blockchain. To create these new payment channels, the Lightning Network takes advantage of multi-signature wallets, meaning a wallet holding BTC that two parties can access with their own private keys. Once the multi-signature wallet is created, both parties deposit a specific amount of BTC and can then transfer funds as many times as they like. The “channel” created is actually the wallet that both parties have access to.
From within the new payment channel, parties can effectively send BTC to each other by simply transferring ownership of the BTC they’ve deposited to the other party in the multi-signature wallet. After signing off on the transaction with their key, the wallet keeps an updated ledger of whose BTC is whose. All of this is going on within the channel and is not recorded on Bitcoin’s blockchain, which is where the increased speed and low transaction fees of the Lightning Network come from. This new channel can remain open indefinitely or can be closed at any time from either party.
Only when the payment channel is closed do the parties actually receive the funds inside the wallet. When it’s time to close the channel, the Lightning Network takes the most recent balance sheet from the wallet and then broadcasts it to the Bitcoin network.
What you end up with is only the initial and final balance being recorded on the blockchain, not the countless small transactions like the purchase of a cup of coffee.
Implications for the Future
Because the Lightning Network intends to handle small transactions off-chain, the Bitcoin community can expect significantly less network congestion even as the number of daily transactions grows. These new proposed payment channels will be able to drastically reduce the amount of transactions recorded on the blockchain as only the important beginning and ending balances need to be confirmed on-chain; and even then, those confirmations only need to occur when a payment channel is closed.
Keeping in line with the goal of increased efficiency and speed, users likely won’t need to create a vast number of bidirectional payment channels of their own either. In theory, once the Lightning Network is fully implemented, transactions will occur quickly by automatically finding the most direct path through the connected network of payment channels, similar to the routing of packets on the internet.
Lastly, and equally as exciting (if not more), is the possibility of cross-chain atomic swaps using the Lightning Network. In the future, users will be able to exchange cryptocurrencies using different blockchains without the need for a third-party intermediary like a cryptocurrency exchange as long as the chains support the same cryptographic hash function.
With the proper implementation, this has massive implications for revolutionizing the way exchanges occur.
For now, the Lightning Network remains in its early stages, but as the network grows and continues to develop, it’s one of the most promising updates for the Bitcoin community.
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