The Lightning Network Explained: The Solution to Fast and Feeless Bitcoin Transactions

The Lightning Network Explained: The Solution to Fast and Feeless Bitcoin Transactions

The Bitcoin network is undoubtedly one of the most important financial innovations to have ever been created, but it is still far from perfect. The biggest problem Bitcoin faces is its scalability. That is until now. In this article, we will be looking at the Lightning network.

Bitcoin’s Scalability Problems

As most people know by now, Bitcoin came into creation in 2009; however, Bitcoin’s eventual scalability issues – which we are dealing with now – were anticipated as far back as fall of 2008, when Satoshi Nakamoto published the Bitcoin whitepaper.

The first reply to this 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.”

Bitcoin is capable of processing seven transactions per second, or TPS. Visa by comparison, is capable of handling 65,000 TPS. This is due to Bitcoin’s carefully balanced block size and block time. Bitcoin blocks are each 1 MB in size and because these blocks are so small, only 2,500 to 2,700 transactions can fit inside a block on average. Furthermore, blocks usually take about 10 minutes to mine. The obvious solution to ramping up Bitcoin’s speed would be to increase the block size and/or block time. Unfortunately, this solution compromises Bitcoin’s security, and decentralization. If the blocks are too large, or too fast, then only a handful of computers – relative to how many currently mine Bitcoin now – would be able to process Bitcoin transactions. This problem would later become known as the blockchain trilemma: a concept coined by Ethereum creator Vitalik Buterin, stating blockchains are governed by three aspects – decentralization, scalability, and security – and that blockchain creators are forced with sacrificing one of these three aspects, in order to keep the other two.

Layer-Two Scaling Solutions: The Lightning Network

Luckily for Bitcoin, the Lightning Network is the solution to this problem. The Lightning Network allows users to securely send and receive Bitcoin transactions with one another, at the speed of network latency (almost instantaneously), at little to no cost. The Lightning network achieves this through what is known as a layer-two scaling solution.

Layer-two scaling solutions are essentially networks which operate on top of the original network, often to facilitate faster transaction speeds. Although most layer-two scaling solutions utilize their own blockchains, the Lightning Network does not. Instead, the Lightning Network uses a series of interconnected payment channels, which are created between two parties on the Bitcoin network.

The Lightning Network: How it Works

The Lightning Network utilizes what is known as a multi-signature wallet. Basically, the Lightning Network acts as a kind of Bitcoin IOU system, that is settled with an actual Bitcoin transaction, when the contract comes to completion. Both parties deposit Bitcoin into the Lightning Network, and as they transact with one another, the respective value of bitcoin that each respective user had initially deposited changes. When a purchase is made, an IOU is sent from one user to another, and both computers involved in the transaction make a copy of each of their respective balances. The process is somewhat like that of Directed Acyclic Graph technology (DAG). If you are curious to learn more about DAG, you can read about it with this link to our article on Alternative Consensus Mechanisms .

Lightning Network Transactions

The Lightning Network differs from DAGs in in how it handles transactions between users whose wallets are not directly linked with one another. With DAG technology, users must be connected directly with one another; however, with the Lightning Network, this is not necessary. 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.

Lightning Network Adoption

The Lightning Network is already seeing a lot of use. That amount of use is expected to drastically increase in September, when the Lightning Network will be the primary means of processing transactions in El Salvador: The first country in history to adopt Bitcoin as a national currency. If you are curious to learn more, check out this link to our article: El Salvador Votes in Bitcoin as Legal Tender .

The Lightning Network is also not strictly limited to use with only Bitcoin. The Lightning Network can be used with any cryptocurrency which supports both multi-signature wallet and HTLC functionality. Suffice to say, the Lightning Network can be integrated into most cryptocurrency platforms.

In Conclusion

The Lightning Network is an exciting and crucial technology for the mainstream adoption of Bitcoin. The lightning network is the technology that will progress bitcoin forward, allowing it to become a viable option for everyday transactions.

Killer Whale Crypto