In today’s BITCOIN8M series, we’ll discuss the lightning network. The lightning network is a solution described as a “Layer 2” protocol that, once mass adopted, will enable users to make much faster transactions at a cheaper fee across the network.
If you’re wondering why Bitcoin transactions need a solution, to make them be faster or more affordable, we suggest you start by skimming through the posts below:
- 6 Prominent Bitcoin Scalability Problems and How They Affect Its Full Scale Adoption
- Bitcoin Block Size Debate Limit And Controversies.
- SegWit VS. Big Blocks: the Faceoff.
What is the Bitcoin Lightning Network?
As predicted by James A Donald; the first person to publicly make a comment about Bitcoin when it was initially proposed by Satoshi Nakamoto, the biggest issue Bitcoin and altcoins have is scalability. In 2008, he had the following to say about Bitcoin “The way I understand your proposal, it does not seem to scale to the required size” and unfortunately, that is still the case today.”
This is where the lightning network comes into play.
Hence, we describe the lightning network as an extra layer built on Bitcoin that allows users to create a payment channel between the involved parties. With this layer, transactions will be instantaneous and the fees will be reduced greatly as these transactions won’t be kept on the main Bitcoin network.
How Lightning Network Works?
The concept of Lightning Network was created in 2015 by Joseph Poon and Thaddeus Dryja. Currently, there are 3 startups working on 3 major developments of the Bitcoin Lightning Network . As shown by recent tests, these major developments can work with one another effectively.
These companies make use of different programming languages in the development of the Lightning Network.
- Blockstream uses language C to work on the LN version.
- Lightning Labs uses Golang to create a Lightning Network Daemon (IND).
- ACINQ works on Scala Implementation. The Lightning Network proposes a system without the need for a third party and a decentralized network of the payment channels. In the Lightning Network, every party is seen as a node and the nodes are then interconnected with other nodes on the Networks.
Assuming an individual does not have an active payment channel with you and this person wants to send you a lightning transaction, the person can simply make use of other nodes as a ‘hop’ to locate a channel that is already opened and make the payment immediately. Take these payment channels below as an example.
- First channel = Mark and Liz
- Second channel = Liz and John
- Third channel = John and Dave
Assuming Mark needs to make a payment to Dave but doesn’t have a payment channel with him, Mark will have to use John as a ‘hop’ to send the Lightning Network transaction since John and Dave already have an active payment channel. This process would reduce congestion because Mark wouldn’t have to open a new payment channel with Dave.
On the Lightning Network, transactions can be made by users by finding the nearest hop for a transaction and then the network does the rest.
Role of the Lightning Network in Solving Bitcoin Scalability Issues
The Lightning Network makes it possible for payments to be settled immediately: Payments made via the Lightning Network happen instantly. It takes a fraction of a second for the money sent to cross the Bitcoin network to its destination and back to you.
The Bitcoin Lightning Network makes small payments Possible: Since the cost of transactions is now greatly reduced and transaction fees are now a proportion of the total amount of the payment, a person can end up paying a fraction of a cent.
Also, the record of every transaction does not need to be stored on the blockchain, at least not until the payment channel is closed and the balance is paid to the involved parties.
Any Disadvantages?
First, there are possibilities of centralization with the lightning network solution.This is encouraged in payment hubs by the Bitcoin Lightning Network. It is comparable to miner centralization.
There could also be peer failure. If one of the peers involved in a transaction is not responsive, the users could be kept waiting for hours until a payment channel is closed before the money can be sent through another route.
The Lightning Network is not ideal for payments of large funds. There might not be enough funds in peers multisig wallets for a large transfer even though several payment channels might exist.
Offline payments are not available on this solution. The bitcoin Lightning Network does not allow users to make payments to anyone that is not online. Bitcoin’s lightning network would make the payment of tiny funds very seamless rather than filling the blockchain with millions of tiny transactions. Large transactions can also be settled as a combination of hundreds of tiny transactions.
With Layer-2-Network, scalability would no longer be an issue for Bitcoin as it would be able to handle billions of transactions on a daily basis without taking forever. A major importance of Layer-2-Networks such as the Lightning Network is that they can also be used on other blockchain protocols as long as it has the recipe built-in which is the multi-sign scheme.
Several experiments are currently being carried out for Layer-2-Networks on other blockchain systems such as Cardano, Ethereum and EOS. The lightning network is also supported by all major wallets and once its application goes full scale, we would definitely see a revolution of the decentralized finance system where there would be no problem as regards scalability.
All the Layer-2-Network solutions such as the Lightning Network brings us closer to the vision of having a decentralized global currency.
Lightning networks and other similar Layer-2 Network solutions bring us one step closer to a vision of a widely adopted decentralized global currency.
Bottomline?
As proposals to solve the block size issue surface, the question of BTC’s future still remains. Will it ever be a cheap and fast payment channel like Visa and Mastercard? While the bitcoin ecosystem is still evolving, it is uncertain if the underlying code that governs it will be altered. One thing is for sure, a larger block size should be able to solve the scalability issue that is an inherent problem in blockchain technology today. But whether or not we’ll see that happening in the near future, still remains a question mark. The Bitcoin8m project is one that agrees to and spreads awareness about the benefits of a bigger block size. PLEASE NOTE THAT THIS PROJECT IS IN NO WAY INTENDED TO CAUSE A HARD FORK. We suggest you read this new dedicated post on How bitcoin8m is created and why it won’t cause a hard fork to get the full picture.
