Guide: What is Lightning Network?
Since Bitcoin network started processing a significant number of transactions, it became obvious that the network needed scalability. One of the solutions to the problem of scalability was Lightning Network invented in 2015. It is a so-called second layer solution that allows making transactions outside blockchain, so that they are free and instant. It enables to significantly increase scalability enabling millions of transactions per second without modifying the blockchain or forking it. The Lightning protocol isn’t managed by anybody, instead it’s a series of compatible technologies.
How it works
The Network is based on bilateral payment channels. These channels are upgraded multisignature wallets. In order to use the Lightning Network the involved parties should open the payment channel with a transaction on the main network and connect it to other payment channels. To set up a channel on the Lightning Network one needs to create a multisig wallet, which is a wallet the users can access with their respective private keys. The information about the payment channel is broadcasted to the blockchain in the form of its initial and final balance. So other transactions within the channel are not written in the blockchain.
The main feature of the Lightning Network is its ability to transfer money between the payment channels outside blockchain. It eliminates the need in opening a new channel each time when you make a new transaction. The information about the payment channel is broadcasted to the blockchain in the form of its initial and final balance. Other transactions within the channel are not written in the blockchain.
The transactions can be effected directly to the node or indirectly to any other node that node is connected to. Let’s imagine, you want to pay your order in a café with Bitcoins for the first time and you don’t have an open channel with them. But you have an open channel with your friend, he has an open channel with his brother, and his brother has an open channel with this café. In this situation your transaction can rout the Bitcoin through your friend’s and his brother’s channels to the café. Though there is a limitation — if the amount of transaction is 0,0002 BTC, both your friend and his brother should have not less than 0,0002 BTC on their payment channels, otherwise the transfer won’t be routed through them.
When the technology becomes widely adopted it won’t be necessary to set up a dedicated channel each time to send funds to a certain person. Instead, it will be possible to send payments to someone using channels with people that you are already connected with and the system will automatically find the shortest route. The growing popularity of Lightning Network technology stimulates appearance of payment hubs. Such hubs are Lightning nodes with a number of open channels containing a large amount of cryptocurrency and enabling people to transfer payments in return for commission. They have a disadvantage of creating the element of centralization. Though, they have an advantage as well as they create an incentive to run Lightning nodes.
Pros and cons
➕ Increased scalability
➕ High transaction speed
➕ Low transaction fees
➕ Privacy and anonymity
➕ No entry barriers
➖ Complexity of channels
➖ Requires creating a payment request
➖ Lower security level
➖ Not suitable for large transactions
➖ Not fully operational
Development
Several startups are developing their own implementation of the Lightning Network Protocol using different programming languages. There are three major implementations:
✔ The Lightning Labs: Lightning Network Daemon (LND) written in Golang. The Lightning Labs released a beta version of its software in March 2018 providing the Lightning Network for real payments.
✔ ACINQ: Scala implementation of the Lightning Network.
✔ Blockstream: The C-lightning implementation.
The technology was originally designed for Bitcoin, but currently it is being developed for a number of altcoins, including Ethereum, Litecoin, Ripple, and more. Not all crypto projects implement Lightning Network exactly as it was initially described. Instead, they use the concept as the basis and try to adjust it to their needs.
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