What Is Lightning Network and How Does It Work?

Lightning network is a payment protocol that exists as a second layer above Bitcoin blockchain which enables people to make transactions with one another. Payment channels are established directly, and also indirectly, between two users to make transactional processes seamless and fast.

The protocol was built to solve the Bitcoin’s scalability problem by enabling instant peer-to-peer transactions with the movement of small and frequent transactions off-chain. Bitcoin has the capacity to process just seven transactions per second, which is an issue because new users are adopting the payment method every day, and the number of transactions being made is constantly increasing.

What is the Lightning Network?

The Lightning network is an overlay system which was built on Bitcoin blockchain to enable fast and private payments with payment channels. The off-chain payment solution has the capacity to process millions of transactions with little to no fees at all.

The important details, as well as the cryptographic approvals of the transaction amounts, are recorded on the blockchain. Hence users will still be able to gain from the security features of Bitcoin blockchain. 

The Lightning network helps in reducing the traffic congestion present in Bitcoin blockchain whilst offering more appropriate transaction fees.

How does Lightning Network Work?

The Lightning network acts as an additional transaction network which makes use of special interconnected payment channels which are activated when users connect to nodes.

A payment channel is a private link between two users which allows them to make off-chain transactions, and this can only be made possible with the consent and signature of all parties. Each of the users possesses a private key which provides access into the address of the channel.

The payment channels can be closed by either of the transaction participants at any point in time. This can be done by broadcasting the most recent balance sheet signed by the parties to the main Bitcoin network.

The channel is terminated preceded by a transaction distributing funds into the accounts of the participating parties. A Lightning node or wallet is needed to set up a Lightning channel, with widely accepted options like Éclair, Lightning app and Bluewallet which are wallets, as well as Ind and C-lightning which are nodes.

A payment channel could then be created using the node or wallet with a distinct code that is specific for use on one of them.

Who Developed the Lightning Network?

The payment solution was introduced by two developers, Joseph Poon, and Thaddeus Dryja, in 2015 with a white paper released titled ‘The Bitcoin Lightning Network: Scalable Off-chain Instant Payments.’ The white paper has since then gone through many review changes.

The white paper revealed details of its operations and efficiencies as a significant solution to the scaling problem poised with the underlying Bitcoin network. 

Lightning Labs, ACINQ, and Blockstream are the teams working on the development of the network, with input from other members of the community helping in its growing process. The Lightning Network is still being developed further with more features being added to it.

When will Lightning Network Be Used?

The Lightning network comes into place as a solution for small-scale and large-scale transactions which can be made off-chain, which significantly reduces the traffic on the main Bitcoin blockchain. The network also helps in lowering transactions fees made using Bitcoin blockchain and provides a way to make lightning-fast payments.

The Lightning network also has anti-fraud and security protection system built into it which makes it hard for users to fall prey to frauds and thefts. The elimination of intermediaries makes it better for payments to be made without delay or approval.

Pros and Cons of the Lightning Network

The Lightning network comes with its own benefits and drawbacks, but the benefits of this system far outweigh the risks involved with it.

Among its pros we should mention:

1. Security and Privacy: The transactions made on the Lightning network are highly secure due to the underlying Bitcoin blockchain as well as the fact that the transactions being made are done through payment channels which makes them very hard to trace and less susceptible to hacks.
2. Scalability: The network makes it possible for millions and possibly even billions of transactions to be processed per second. This greatly solves the problem faced by the underlying Bitcoin blockchain and makes it a thing of the past.
3. Transaction Fees: The fees charged for every transaction on the network have been reduced, which makes it possible for micropayments to be made, which was impossible before due to the high fees.
4. Instant Payments: Payments made now are instantaneous due to the Lightning network which was previously unattainable seeing as users have to wait for a certain amount of confirmation period.

To the cons we can refer:

1. Centralization: A relatively small amount of centralization exists on the network due to its necessary node system. If the nodes end up being a point of failure, it might affect ongoing transactions.
2. Online Necessity: Transactions made through the channels on the network can only be made possible through the use of an internet connection. This means the system can’t serve its purpose offline and requires both parties to be online for the completion of a transaction.
3. Transparency: The transparency of the whole setup drops on a per-transaction basis seeing as countless transactions are being made every minute; this means the network won’t work well with regulation-compliant bodies.

Conclusion

Every innovation comes with its benefits and drawbacks, with the Lightning network still under development, it’s safe to say the payment system still has room to grow and expand past its current limitations.

The Lightning network is a great choice of a payment solution for anyone looking to make micropayments in minimal time and with minimum charges.