Introduction on Lightning Network and off-chain transactions

One of the main issues of Bitcoin is the slowness and costly on each transaction.

Until today — November 12th, 2017 — the average cost for a bitcoin transaction is $7.

The reason is that Bitcoin keep going to be always more used by people around the world and always more exchanged.

Currently, the protocol allows only 7 transactions per second to be validated against the thousands of transactions per second that can handle by VISA circuit. That happens because every block, which is validated by miners every 10 minutes, weighs 1MB therefore it doesn’t allow to get more than that number of transactions over that time frame.

If the goal is to become a mainstream payment method and the only coin used by people, it is of utmost importance for Bitcoin to increase validities transactions and to eliminate this kind of problem.

With Lightning Network that is possible, thanks to the simple reason that transactions are not validated by miners in the blockchain, but they are off-chain, outside of it.

LN will allow us to have:

  • thousands of transactions per second, with no needs of any confirmation;
  • very low commissions, which will also allow micro-payments;
  • instant payments, as you will not have to wait for the miners to confirm;
  • swap bitcoin with other cryptocurrencies thanks to Atomic Swap.

Using Lightning Network, therefore, it’s possible to transact bitcoins, without that those transactions appear in the blockchain, with very low fees and no needs of any confirmation, thanks to the creation of external channels, outside of it, through which thousands of transactions per second are also made.

In a few words, a proper channel is created to connect 2 people who want to exchange regularly bitcoins, in a way to not create a blockchain for every transaction.

At the beginning, both have to insert an amount to open that channel, subscribing that those 2 people have opened a common fund, which is managed off-chain.

Everything that will happen through this channel until its closing, will not appear on the Blockchain so it shouldn’t be written in the blocks.

It will have not to wait for the miner’s confirmations, and users will have not to pay the transaction fee.

Let’s give an example:

Anna and Bob decide to open a channel by entering 0.5 BTC to head into it.
Blockchain subscribe the opening of the channel containing 1 BTC and since this moment, each exchange between Anna and Bob are off-chain.
Now, Anna wants to buy from Bob 0.1 BTC of merchandise:
she creates a transaction called commitment transaction, where Anna will indicate on the transaction that she will send 0.4 BTC to herself and 0.6 BTC to Bob, from the channel common fund, and then she has to sign it.
After that, Bob will also create a commitment transaction where he will send 0.6 BTC to himself and 0.4 BTC to Anna from the channel common fund, and then he has to sign it too.

Every operation has been done off-chain and is not required Blockchain supervision. Blockchain hasn’t to write anything, just the opening and closing channel state.

We simplify the concept of LN to give a simple meaning. Anyway it is better to study the specific channels. In fact, Lightning Network allows the opening of those off-chain channels in the way that those exchanges can be made quickly, with low commissions fees, with no needs of any confirmation and in numbers far higher than any existing monetary circuit on the planet.

Therefore, the implementation of this Network resolves scalability and cost problems that doesn’t allow bitcoin to be the world currency which all its supporters would like to become to be.

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