What is the Lightning Network?
The lightning network in essence is all about scalability. It serves as a second layer with the sole purpose of solving Bitcoin’s scalability problem. The Lightning mainnet was introduced and launched in March 2018. So how does it work and how will it fit into Bitcoin’s future as a means to solve scalability and bring Bitcoin to the masses?
Bitcoin scalability - why is it important?
So let us go back to the beginning, back in 2008 Satoshi Nakamoto put the Bitcoin whitepaper out there to the world - one of the comments was that “the way I understand your proposal, it does not seem to scale to the required size”. Ten years later, scalability is still the biggest problem for Bitcoin.
So what do we actually mean by scalability? Well since Bitcoin’s inception, it has only been capable of processing approximately 7 transactions per second. Back in 2008 this was fine as not many people used the blockchain. But fast-forward a few years you can see that the system has become congested with long transaction times and high fees. For Bitcoin to become a truly developed alternative to Fiat currency, it will need to be able to not only compete with them but to be better than them as well. To put some perspective on this, Visa averages around 24,000 transactions per second but can in fact through peak times increase that rate to 50,000. I think we can see the problem here for Bitcoin
Over the years many of Bitcoin’s ardent supporters have tried and failed to come up with ways to solve this problem. Some have even gone as far to fork off the Bitcoin chain to create their own spin-off currency for the sole purpose of increasing the block size to enable a higher transaction rate, notably Bitcoin Cash.
However even forked versions of Bitcoin haven’t stopped the one and only original to come up with a different solution, that is the lightning network.
The Lightning Network essentially adds another layer to the Bitcoin blockchain which enables a user to create a payment pathway between any two parties on that new layer (Lightning Network). This new pathway can exist as long as necessary, and as they are setup between two users, any transaction that is made will be almost instantaneous with very low to zero fees for doing the transaction
How would the Lightning Network work in the real world?
So the above is all well and good, but how could it and would it work in practice in everyday life? Let us look at an example, say we have two people. Mike & Angela, and Mike needs to send some Bitcoin to Angela so that she can purchase some computer equipment for her business. They need to do it quickly, cheaply and potentially once a month. Now their current ‘traditional’ bank can of course execute this, but it is really rather slow and expensive. So they will need to do the following: -
- Setup their own ‘channel’ on the Lightning Network
- Create a multisignature wallet (this is a wallet enabling then access with their private keys)
- They then deposit the amount of Bitcoin required into the wallet
- Mike & Angela can then perform unlimited transactions between themselves
What these transactions effectively are is a redistribution of funds to each other in a shared wallet. So if Mike wants to send Angela 0.5 BTC, he will just need to transfer ownership rights to Angela. Then the two of them use their private key to sign for an updated balance
The distribution of the funds actually happens when the channel closes. There is an algorithm that uses the most recent signed balance sheet (which was done vua your private key)to determine who gets what. So Mike & Angela could easily close their channel once they are done with it
Only once your channel is closed can the information about initial balance and final balance is then broadcasted to the Bitcoin network. So in essence what the Lightning Network is doing is enabling all of its users to conduct all these transactions outside of the main chain but then record them as a single one once the balances have been reconciled.
What is interesting here is that once the Lightning Network gets mass adoption, you won’t necessarily need to set up dedicated channels, instead what will happen is that you will be able to send payments to people using channels with people that you are already connected with. The system will always find the shortest path. This is how it looking as to how the Lightning Network will eventually make Bitcoin mature
Are there any drawbacks?
As with all maturing technology and ecosystems there are going to be shortfalls and drawbacks. One of the key concerns over the Lightning network is security, or thereof lack of it. As the Lightning Network is a chain on top of the main blockchain it will not have any security of its own. So it could be that it is just used for very small transactions such as paying for your coffee or at the cinema. LArger transactions are still likely to be done on the original layer
It also isn’t fully operational which is one of the main drawbacks, so like anything nobody knows how good it is as you cannot just go and test it right now
There are also reports that the new Lightning Network is becoming increasingly centralised and open to attack reported by Coindesk as recently as February 2020
If the Lightning Network pays off then we could finally see mass adoption and make Bitcoin a much more attractive proposition for the masses than ever before. It could truly be the game-changer to move the needle for people around the world to move from fiat to cryptocurrency. It is not only Bitcoin utilising the Lightning Network either for their currency, currencies such as Litecoin, Monero, Dash and more are building this new technology into their ecosystems