{"id":18410,"date":"2020-10-09T04:00:00","date_gmt":"2020-10-09T04:00:00","guid":{"rendered":"http:\/\/ci027d002ec00026c3"},"modified":"2024-12-20T14:39:32","modified_gmt":"2024-12-20T14:39:32","slug":"lightning-network","status":"publish","type":"post","link":"https:\/\/bitcoinmagazine.com\/guides\/lightning-network","title":{"rendered":"What Is The Lightning Network?"},"content":{"rendered":"
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The Lightning Network is a solution to Bitcoin\u2019s scalability requirement. It\u2019s a second-layer network of interconnected nodes built on the Bitcoin blockchain to speed up transaction times and decrease network congestion for instant, secure and low-cost micropayments.\u00a0<\/span><\/p>\n

The transaction mechanism between two parties occurs off-chain, removing much data from the base layer blockchain, thereby facilitating speed and transaction traffic. Lightning users do not need to wait for Bitcoin blockchain confirmations every ~10 minutes; therefore, transactions are instant.<\/span><\/p>\n

Indeed, Lightning payments are not recorded on Bitcoin\u2019s blockchain \u2014 only channel-funding and channel-closing transactions are. This effectively means that many more Lightning transactions can be settled with fewer on-chain Bitcoin transactions \u2014 a benefit that translates into lower fees for Lightning users without delegating custody of funds.\u00a0<\/span><\/p>\n

Like the Bitcoin blockchain, the Lightning Network doesn\u2019t need a financial intermediary to process, verify and approve transactions.<\/span><\/p>\n

Origins Of The Lightning Network<\/span><\/h2>\n

The story of the <\/span>Lightning Network’s evolution<\/span><\/a> is fascinating. Initially proposed by Joseph Poon and Tadge Dryja in 2015, an <\/span>early version<\/span><\/a> of the whitepaper was released that same year. The <\/span>official version<\/span><\/a> was then published on January 14, 2016, detailing a second-layer payment network aimed at facilitating faster and more affordable transactions.<\/span><\/p>\n

However, the idea was not new; in fact, in the very first Bitcoin software release (Bitcoin 0.1), Satoshi Nakamoto himself had already drafted a code that would let users update a transaction before it was confirmed:\u00a0<\/span><\/p>\n

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The Lightning Network, or simply \u201cLightning,\u201d is based on a concept called \u201cpayment channels,\u201d which are essentially bitcoin balances between two users. The rest of the world does not need to know \u2014 or even care \u2014 about their mutual balances, nor does the entire network need to be burdened with their transaction data. Balances can be updated without miners needing to verify and process transactions as is required in on-chain Bitcoin transactions.\u00a0<\/span><\/p>\n

Poon and Dryja believed that a network of micropayment channels built on top of the base chain would be more suited to fix Bitcoin\u2019s scalability issues as it would not require significant changes in the Bitcoin network itself to allow more efficient and cheaper transactions. Work on the Lightning Network picked up momentum as developers began working on the project.\u00a0<\/span><\/p>\n

The blockchain engineering lab behind Lightning helped launch its beta version in March 2018. It was initially funded via a $2.5 million seed round, which included notable investors Jack Dorsey and Blockstream. Dorsey\u2019s company, Square, has since funded several grants for Bitcoin and Lightning Network projects.<\/span><\/p>\n

In keeping with Satoshi\u2019s vision for Bitcoin, Lightning Labs created a permissionless network, which is deployed on the internet and runs on thousands of nodes worldwide, making it difficult to control as it\u2019s not run on centralized servers.<\/span><\/p>\n

How Does The Lightning Network Work?<\/span><\/h2>\n

The Lightning Network is a decentralized payment channel network that uses blockchain smart contract functionality to enable instant payments among participants. It is run by a network of nodes that process payments, and transactions are commonly made using QR codes instead of complex public keys. Thousands, or even hundreds of thousands, of transactions can take place instantly, making small-value transactions economical.<\/span><\/p>\n

A payment channel can be described as a complex type of multisignature address containing funds shared by two users having the other\u2019s presigned revocation key to the 2-of-2 multisig wallet that is their channel. When a payment between them occurs, they update their respective balance of funds at that address.<\/span><\/p>\n

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Using these payment channels between participants, the Lightning Network can handle transactions without waiting for the leading network to confirm them, saving time and fees. Between the opening and closing of a channel, parties can shift funds between themselves as needed until they close the channel. Only once the channel is closed does the final channel state confirm on the main blockchain.<\/span><\/p>\n

To ensure that neither user can cheat and claim more than their share, complex safety precautions, like so-called \u201cwatchtowers,\u201d are used (more on that below).<\/span><\/p>\n

While on Bitcoin, miners are paid fees to include transactions in a block, the Lightning Network doesn\u2019t have miners or blocks, and fees are paid to the nodes that provide liquidity (funded channels) and forward transactions. Since anyone can set up another node, fees must be kept relatively low for the nodes to be competitive.\u00a0<\/span><\/p>\n

A payment channel life cycle can be described as follows:<\/span><\/p>\n

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  1. Alice creates a payment channel with Bob, and they both broadcast a transaction to fund the wallet with 2 BTC.<\/span><\/li>\n
  2. Alice and Bob exchange funds in the channel as many times as they need, but no transaction between them is broadcasted to the base layer.<\/span><\/li>\n
  3. When Alice and Bob do not need to transact anymore they can close the channel and broadcast the closing transaction.<\/span><\/li>\n<\/ol>\n

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    The payment channels are cryptographically linked with other payment channels. Similar to the concept of \u201csix degrees of separation,\u201d as long as users have an active payment channel, they can act as bridges between channels.\u00a0<\/span><\/p>\n

    In other words, if Alice has a payment channel open with Bob and Bob has a payment channel open with Carol, Alice can pay Carol through Bob in a way that none of the parties involved can cheat by stealing the funds or claiming they have or haven\u2019t sent or received the funds.\u00a0<\/span><\/p>\n

    To receive a transaction, a Lightning user creates an invoice represented by a long alphanumeric string of digits \u2014 or a QR code, more likely. To send the payment, the counterpart simply needs to scan this invoice with their Lightning wallet and confirm the payment through their digital signature. The transaction is nearly instant, and the process requires no intermediate as it\u2019s made peer-to-peer.<\/span><\/p>\n

    What Does It Solve or Enable?<\/span><\/h2>\n

    The Lightning Network was initially created to address the Bitcoin blockchain scalability problem, which refers to the limitations on the rate at which the Bitcoin network can process transactions. Per <\/span>the Blockchain Trilemma<\/span><\/a>, the Bitcoin protocol prioritizes decentralization and security over scalability (and therefore speed), so the number of transactions becomes a binding limit.\u00a0<\/span><\/p>\n

    As a consequence, each block in the Bitcoin blockchain is limited to 1.5-2MB in size and can only be created approximately every 10 minutes. This means that the Bitcoin network can only process a certain number of transactions per block and per unit of time, approximately 7 transactions per second (tps). Bitcoin\u2019s base layer cannot serve as the world\u2019s payment platform, while the Lightning Network, in contrast, is an excellent method to aggregate all transactions in a way that doesn\u2019t sacrifice the decentralization and security of the base layer network.<\/span><\/p>\n

    Solutions like Lightning will become much more necessary as we move forward into the future. Particularly with the rise in AI and robotics, businesses will seek to reduce credit and debit card processing costs. Bitcoin\u2019s network is not sustainable from an efficiency standpoint, with fees likely to increase on the mainchain, and its eventual progression to being a unit of account will necessitate a fast, efficient and cheap system. Hence, the Lightning Network will play a crucial role as a microtransaction payment system.<\/span><\/p>\n

    Here are the main issues the Lightning Network may resolve.<\/span><\/p>\n

    Micropayments<\/span><\/h3>\n

    Lightning enables micropayments without needing an intermediary \u2014 at lightning speed and extremely low cost. While it\u2019s not viable for the Bitcoin mainchain to process low-value transactions, the Lightning Network is ideally suited for sending payments as low as 0.00000001 Bitcoin without custodial risk.\u00a0<\/span><\/p>\n

    As bitcoin\u2019s value has risen to the point that mere fractions of BTC are enough to pay for many goods and services, BTC is more often denominated in satoshis (\u201csats\u201d) and frequently mentioned when discussing the Lightning Network.\u00a0<\/span><\/p>\n

    Instant Payments\u00a0<\/span><\/h3>\n

    Since Lightning transactions do not need to worry about block confirmation times, they can occur almost instantaneously while still enjoying the security enforced by the Bitcoin blockchain. It\u2019s finally possible to buy coffee promptly using bitcoin.<\/span><\/p>\n

    Scalability<\/span><\/h3>\n

    While Visa\u2019s transaction throughput has a maximum of 47,000 transactions per second (47,000 tps), the Lightning Network is believed to be able to process as many as 1 to 3 million tps.<\/span><\/p>\n

    Advantages of the Lightning Network<\/span><\/h2>\n

    Built on the Bitcoin blockchain, Lightning provides the security and decentralization of the leading network with additional benefits over the native blockchain. It solves the scalability problem by taking the transactions off the blockchain and carrying them in Layer 2 blocks, becoming much faster and more efficient. Transactions are performed through a payment channel, a two-party consensus mechanism.\u00a0<\/span><\/p>\n

    Here are the main advantages of the Lightning Network over Bitcoin\u2019s main network.<\/span><\/p>\n