Lightning Network — A Bright Future for the Globalization of Cryptocurrencies
“Bitcoin itself cannot scale to have every financial transaction in the world broadcast to everyone and included in the blockchain. There needs to be a secondary level of payment system which is lighter weight and more efficient. Likewise, the time needed for Bitcoin transactions to finalize will be impractical for medium to large value purchases.” — Hal Finney describes the need for tiered scaling solutions in the BitcoinTalk forum.
Bitcoin’s blockchain can only process an average of 7 transactions per second. This, of course, is not enough to make it a suitable platform for processing the millions of transactions people make daily. Thus, for Bitcoin to qualify as a medium of exchange, payment systems must be created that allow users to make bitcoin transactions quickly and cheaply. Lightning Network is one such payment system.
At the end of this article, we will consider a fundamental development that is implemented thanks to the capabilities of Lightning network and OmniLayer, namely OmniBOLT (but everything in order)! Here we go!
What is the Lightning Network?
Lightning Network is a technical solution being developed as a second-layer blockchain network protocol. Deployed on top of bitcoin, the Lightning Network uses advanced smart contracts to achieve higher transaction throughput while maintaining the peer-to-peer nature of the bitcoin protocol.
Since payments via the Lightning network are not recorded on the blockchain and therefore do not require mining, lightning payments are incomparably faster and cheaper.
The solution was first presented at the Scaling Bitcoin conference in Montreal in September 2015.
How does the Lightning Network work?
Like the Bitcoin network, the Lightning network consists of nodes running specialized Lightning Network software. However, unlike the Bitcoin network, lightning transactions are not broadcast publicly and are not stored by all network participants. Individual lightning nodes communicate with each other privately. Lightning nodes use channels to perform transactions between themselves.
What is a Lightning payment channel?
A lightning channel is a bi-directional payment channel, that is, both parties can send and receive payments through it. Lightning channels form a Lightning network and have a certain capacity — bandwidth — in bitcoins. This capacity is distributed between the two sides of the channel, and bitcoins move between them in lightning transactions.
How does Lightning Network technically work?
The key principle of the Lightning Network is the use of payment channels, in which funds are placed between participants. The payment channel is a multi-signature (multi-sig) wallet in which a certain amount of bitcoins is stored. Coins can be provided by both parties or only one of them.
The channel is opened through a normal bitcoin transaction, which means that in this case the data of this transaction is written to the blockchain (the data is also written to the blockchain when the channel is closed). However, thereafter, all transactions performed within the channel take place directly between the participants without writing data to the blockchain.
A payment channel is essentially analogous to a safe in which money is deposited and then available to a certain circle of people. But, to open the safe you need to know the combination of digits, in our case we use private keys.
Simple Example
“Hey, Andrew! Why is it so difficult? Can you tell me in simpler words and examples?” — ordinary crypto-enthusiast.
“Okay, here’s a simple example” — The author of the article (I mean me, lol).
The simplest example of using Lightning network technology is when John’s favorite coffee shop announced that it had started accepting bitcoins as payment. But paying each time for a cup of coffee, creating a separate transaction, can be too costly because of the fees involved, plus it takes a while to confirm the transaction.
This is where the Lightning network comes to the rescue. John opens a payment channel between himself and the coffee shop and deposits 0.01 BTC, let’s suppose, that he is going to spend later on ordering coffee. When the channel is created, the balance of John shows 0.01 BTC, while the balance of the coffee shop shows 0 BTC.
Let’s say that a cup of coffee costs 0.0005 BTC. After the first order, the balance John will show 0.0095 BTC, and the balance of the coffee shop will show 0.0005 BTC. Thus, John can order coffee until his balance is zeroed out or he decides to close the channel. With each transaction, John and the coffee shop sign an updated smart contract showing how many coins in the channel belong to each party. As mentioned, this data is not written to the blockchain — instead, each party keeps its own copy of the smart contract.
Is it necessary to open a new payment channel for each new side of the transaction?
No, the Lightning Network, as the name says, is networked. This means that John may not have an open payment channel with Andrew, but may be connected to him through Maggie or Victor, or even through several members. That is, users can exchange transactions with any other users who are connected to their network of payment channels through nodes.
The financial incentive in opening such linking nodes is to receive small commissions each time a transaction occurs through one of the channels connected to it.
Through the use of smart contracts, the Lightning Network architecture does not require the trust of the parties. Thus, funds always reach their recipients through intermediaries or are returned to the sender if an indirect route to the recipient is not possible for some reason.
The advantages of a Lighting Network
- Lower cost of commissions;
- Higher payment speed;
- Ability to make payments in a few satoshis, which would be very impractical for direct transfers in the main blockchain;
- Higher anonymity, because when allocating BTC to the Lightning network, there is no information about who will be the recipient and who will be the sender of funds.
What can we expect in the future?
The Lightning Network is still a very young technology, but it does have a great future. The capacity of the network is growing steadily, recently surpassing the 4.250 BTC mark, the number of nodes is approaching 17.000, and the number of open channels has already surpassed 85.000.
In addition, the technology opens the way to fundamentally new solutions such as cross-platform atomic swaps, that is, the instant direct exchange of coins from one network for coins of another without intermediaries such as exchanges and other exchange platforms.
Thus, back in 2017, the first atomic transaction between bitcoin and Litecoin took place on the Lightning Network.
Fundamental developments and integrations (OmniBOLT)
To fully understand what OmniBOLT is, let’s first look at what OmniLayer is!
OmniLayer is neither a fork of Bitcoin nor its own network, but rather a meta-layer on top of Bitcoin. It is essentially a software layer built on top of the Bitcoin blockchain that enhances the features of Bitcoin through its own additional characteristics.
By providing smart contract capabilities, OmniLayer enables developers to create new customized cryptocurrencies, automate complex financial functions, and expand the Bitcoin network beyond its own currency in a decentralized and transparent way.
OmniBOLT(Basis of Lightning Technology) is the world’s first stablecoin (on OmniLayer) circulation specification for Lightning Network, and the second most important protocol developed by Omni foundation. It is a big extension of BOLT, the major parts of this spec are p-2-p instant payment and mortgage loans for crypto-assets.
Based on the fundamental theory of the Lightning network, the OmniBOLT specification describes how to enable OmniLayer assets to be transferred via lightning channels, and how can OmniLayer assets benefit from the novel quick payment theory.
What solutions and advantages does OmniBOLT offers us?
1. Instant payment of smart assets issued on OmniLayer.
2. Cross channel atomic swap of different assets.
3. Decentralized exchange on top of lightning channels with quick exchange speed.
4. Collateral Lending contract based on the atomic swap.
5. More flexible contracts for Decentralized Finance.
Conclusion
In conclusion, the development of new solutions to improve blockchain is nothing short of encouragement and the development in this industry is really tangible. Despite some shortcomings, the technology under review is a big step forward and is constantly evolving.
OmniBolt serves as an excellent example of the implementation of Lightning Network technology in one of the first and fundamental developments such as Omnilayer.
Stay tuned for more updates ~
