How the Lightning Network Works

Since its inception, Bitcoin has faced one crucial problem: Low transaction speed. Over the years, there have been many attempts at correcting this problem, however thus far only one of these approaches has been successful. That approach is the Lightning Network. In this piece, we will take a look at how the Lightning Network works, and what the Lightning Network means for the future of Bitcoin.

The Scalability of Bitcoin

Bitcoin is slower than many other cryptocurrencies because of the nature of its scalability. The scalability of Bitcoin is an issue which only gets worse as the total market cap of Bitcoin increases. For this reason, we are seeing a significantly slower Bitcoin, with higher transaction fees, than we’ve ever seen before.

When Satoshi Nakamoto first published the Bitcoin whitepaper back in 2008/09, potential problems with Bitcoin’s future scalability were already being addressed. In fact, when Satoshi released the initial Bitcoin P2P e-cash paper to the world accompanied by the message” I’ve been working on a new electronic cash system that’s fully peer-to-peer, with no trusted third party,” the first reply to his message stated, “We very, very much need such a system, but the way I understand your proposal, it does not seem to scale to the required size.”

Transactions Per Second

When we compare the overall processing speeds of different payment networks, we use a metric known as “Transactions Per Second,” or TPS for short. Visa, being the most widely used payment system, averages a TPS of approximately 65,000. For this reason, Visa is considered the “gold standard” when it comes to measuring the TPS of different payment networks.

Bitcoin can only process seven transactions per second by comparison, but why is this? This is because Visa is highly centralized, meaning the Visa network consists of powerful, dedicated processors. Bitcoin, being a fully peer-to-peer network, relies on many different devices, which are individually owned by its users. Keeping the transactions per second lower allows for a wider range of devices to be used as network validators, or “miners,” therefore dividing up the responsibility of network validation across a wider range of network participants.

Time to get Technical

Bitcoin transactions are divided into “blocks,” which – when validated by the consensus of network participants – are added to the “blockchain Ledger” upon their completion. These blocks are kept relatively small compared to other blockchain powered cryptocurrencies, at the size of 1MB per block. An average of 2,500 to 2,700 transactions can fit inside one block, and a single block takes about 10 minutes to validate, or “mine.”

Based on this math, the obvious way to increase the transaction speed of Bitcoin would be to increase either the size of each block or decrease the amount of time it takes to mine a block, right?

Wrong.

If you were to decrease the amount of time for which a block must be mined, AKA the “block-time” or increase the number of transactions that could fit inside a block, by increasing its volume over 1MB, only a handful of computers would be able to process Bitcoin transactions. This would make Bitcoin more susceptible to manipulation by those few who would be able to own the necessary technological resources to mine Bitcoin in this hypothetical scenario.

The Blockchain Trilemma

The blockchain trilemma is a concept which was proposed by Ethereum creator Vitalik Buterin, which states that any blockchain powered technology is governed by three aspects:

• Decentralization

• Scalability

• Security

The blockchain trilemma states that any blockchain creator must sacrifice one of these three aspects within the layer one protocol of said blockchain technology in order for it to function. If Scalability and security are the most important aspects of a blockchain technology, then the processors used to validate the blockchain would need to be powerful, and would need to be monitored by a tight-knit governing body, such as a tech company. This would of course mean that this hypothetical blockchain technology would be completely centralized and controllable by small number of individuals. Think Visa.

The same goes for the other two possible combinations of aspects within the blockchain trilemma. One aspect must always be sacrificed, or the system will simply stop working once it grows beyond its means. This is what’s currently going on with Bitcoin. luckily for us, there is a solution!

Layer 2 Scaling Solutions

A second-layer scaling solution is essentially another, smaller blockchain, or other means of validation, which interacts with the initial layer 1 blockchain. With a layer 2 scaling solution, the initial layer 1 blockchain can be designed around security and decentralization, much in the same way Bitcoin is designed. In Bitcoin’s case, the layer 2 scaling solution which keeps network fees low and transaction speeds high, is known as the Lightning Network.

The Lightning Network

The Lightning network, designed by Lightning Labs, Inc., utilizes Bitcoin’s multi-signature functionality feature, which was programmed into Bitcoin’s layer 1 protocol by Satoshi Nakamoto, as a means to solve this eventual scalability dilemma. The basic design for the Lightning Network was actually proposed by Satoshi back in 2009. In fact, Satoshi was in the process of coding a layer 2 scaling solution for Bitcoin before his/her/their disappearance on April 23, 2011.

The Lightning Network basically acts a kind of Bitcoin IOU system. An equal amount of Bitcoin is deposited into the lightning network by multiple parties. As users transact with each other for goods and services, the recorded amount of Bitcoin which each user deposited decreases for one party within a transaction and increases for the receiving party. Its similar to how debit transactions are processed within the ACH Push network which we use for in-border transactions on a daily basis.

On the ACH Push network, money isn’t actually transferred instantaneously between accounts, even if it seems like it is. Rather the credit card company using the ACH Push network “credits” the receiving party within a transaction, and the funds are in a state of “pending” until the transaction is completed. This behind the scenes process usually takes about three days to complete.

The Lightning Network is kind of like the ACH push network, in that its users are essentially exchanging IOUs amongst one another. When both parties wish to withdraw their Bitcoin, the Lightning Network then executes one singular Bitcoin transaction between the respective parties. As there is only one actual Bitcoin transaction taking place between both parties, all the small transactions which took place over the Lightning Network share a singular Bitcoin network transaction fee and keep Bitcoin network traffic to a minimum.

Why it’s Called the “Lightning Network”

The most fascinating aspect of the Lightning Network is how it handles transactions between users whose wallets are not directly linked to one another. As we can see in the Diagram above, Alice can send a transaction to Bob through the network, even though the two of them are not directly connected – similar to how a bolt of lightning travels through the sky – using the path of least resistance. Even though Alice and Bob are sending a transaction through a series of wallets owned by anonymous sources, the transaction is still completely secured using hashed time locks. The hashed time lock contract (HTLC) is basically a secret code exchanged between Alice and Bob. That secret code needs to be confirmed by Alice and Bob before the transaction can take place. If anything goes wrong with the transaction along the way, the transaction is cancelled. If the transaction is intentionally interrupted by a third party with malicious intent, that third party is punished accordingly.

Adoption of the Lightning Network

The Lightning network is an indispensable tool for fast, secure, and efficient Bitcoin transactions. Currently, the lightning network is the primary means of processing transactions in the country of El Salvador, which broke ground by adopting Bitcoin as legal tender alongside the US Dollar earlier this year. One of the greatest benefits of the lightning network is its ability to seamlessly transact between cryptocurrencies and fiat currencies, just as easily as it can transact purely in Bitcoin. In fact, the Lightning Network is capable of transacting between fiat currencies and any variety of cryptocurrency which utilizes multi-signature wallet and HTLC functionality (which is almost every blockchain-based cryptocurrency). This means the Lightning Network can be easily integrated into most cryptocurrencies as a layer 2 scaling solution.

What the Lightning Network Means for the Future of Bitcoin

The Lightning Network is an exciting and crucial technology for the mainstream adoption of Bitcoin, and as we have already seen, its implementation is undoubtably part of what has pushed the price of Bitcoin to some of its most recent all-time highs. With Bitcoin becoming more and more mainstream, right now is an incredibly advantageous time to utilize Killer Whale strategies such as Killer Whale Gain BTC , and Killer whale Signals, such as the one-of-a-kind Killer Whale Elite Signals ! Be sure to check out the Killer Whale Products Page to discover our other expertly designed and well proven products!

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