A Primer to The Lightning Network (Part 1)
Multisig Wallets: The Building Blocks of the Lightning Network
On August 8, Bitcoin reached its lock-in threshold for SegWit. This is great news because there are many exciting developments in the pipeline for Bitcoin such as the Lightning Network. This technology will also be available for other Segwit enabled cryptocurrencies including Litecoin, Vertcoin, and Digibyte.
What is the Lightning Network?
The Lightning Network (LN) will allow users to have thousands of transactions through a multisig address. In the LN, you will only have to pay one transaction fee to open and close a channel instead of thousands of transaction fees. It will also allow for off-chain Atomic Swaps i.e. the ability to swap one cryptocurrency for another without going through an exchange. (ex: Bitcoin for Litecoin)
Since the Lightning Network is a big topic to tackle, I will break it down into three articles: 1) Understanding Multisigs as the Building Blocks of the Lightning Network 2) The Lightning Network Between Two People 3) The Full Picture of the Lightning Network. Also, I will be using Litecoin (LTC) as my currency of choice throughout this three-part series.
*Author’s note: I wanted to personally thank Jimmy Song for his insight in breaking down this series into three segments.
What’s a Multisig Address?
A multisig wallet is short for a “multiple signature wallet.” This means that multiple people control this wallet. It is similar to your regular wallet in that it can receive and spend Litecoin (LTC). However, it is unique in that you can only spend LTC if certain conditions are met.
For example, let’s say 3 people decide to create a multisig address together. They can arrange it so that all 3 people have to sign the transaction in order to send the LTC. They can also arrange it so that only 2 out of the 3 people need to sign. They can even do 1 out of 3. This is all made possible through “smart contracts.”
Now let’s pretend we created a multisig wallet where 3 people own it and 3 people must sign the transaction. First, one person initiates a payment of 1 LTC from the address. This creates an open payment channel.
An Open Payment Channel means that a transaction has started but not completed. This will be a key concept in our second article, “The Lightning Network Between Two People.” In the example above, an open payment channel is created when one person initiates a payment by signing a transaction but the other two owners do not. In this way, the transaction isn’t recorded on the blockchain because it hasn’t been broadcast yet.
A Closed Payment Channel is when a initiated transaction has been successfully broadcast to the network. In the example above, this is achieved when all parties in the multisig sign the transaction. Three things happen when a channel is closed:
- A payment of 1 LTC is sent.
- The transaction is recorded on the LTC blockchain.
- The transaction fee is offocially sent to the miners who then process the transaction.
The Lightning Network(LN) is comprised of many multisig address. These are the building blocks of the LN. It leverages the unique properties of Open and Closed Payment Channels to prevent transactions from being immediately recorded on the blockchain saving users from paying a transaction fee for each transaction. Payment channels close when the transaction has been broadcast to the Litecoin network. One way this occurs is when everyone in multisig signs for the transaction. Another way this happens is through something called “Hash Time Locked Contracts.” These contracts delay the spending of a payment until “X” amount of time has passed. This technology is what the Lightning Network uses.
Okay that’s it for now and thanks for reading! You are now ready for Part 2: The Lightning Network Between Two People.
BTC: 36Nc4cJxcwp5Xn6wfo1W9UuC5SRQKXHmYy (Segwit address. Legacy and Segwit chains accepted)