The Lightning Network. What It Is and How It Works
The lightning network is a secondary network built on a primary system. Lightning network’s main purpose is to reduce the workload on the main network and, as a result of this, create faster and smoother transactions
For bitcoin, a lightning network was built to increase the efficiency of scalability on the system and also reduce the number of transactions the network has to process and add to the blockchain.
The lightning network doesn’t change the features of the main network, and it is only there to assist the main network without disrupting the functionality.
How well do you know the cryptocurrency world, with bitcoin being the most popular and used cryptocurrency in the world?
The users of Bitcoin for daily transactions continue to increase as more individuals and organizations accept it as a valid means of payment.
The cryptocurrency world was created to provide an upgrade to the traditional methods of conducting transactions. All cryptocurrency is built on the blockchain network, which is their base network. The blockchain protects transaction data from the cryptocurrency world using Cryptography.
Cryptography is one of the most secure ways to protect your data as it makes use of advanced algorithms, which is difficult to manipulate.
Some features of the blockchain include Decentralization, Scalability, Security, and faster transaction time.
The cryptocurrency has succeeded in solving so many problems, such as the removal of central authority and providing better security, but it still lacks in one critical aspect.
Taking Bitcoin as an example, the daily users of the cryptocurrency increase, the transaction time has become slower, and the charges involved in each transaction has relatively increased.
Bitcoin has initially promised scalability at its launch, the network was able to keep up for a while, but as the volume and number of users increased, the efficiency of the system has reduced in this aspect.
Due to this fact, some transactions were proposed to be moved off the blockchain network to reduce the workload.
Imagine a thousand people paying for early coffee using bitcoin as the daily payment method, each of this transaction will have to be registered the blockchain network individually every morning, what a waste of space.
The efficiency of the scalability of the crypto coin has reduced due to reasons such as this; with the stated problem, the obvious question on every reader’s mind is, what is the next way forward?
What is the Lightning Network?
Due to the decrease in efficiency of scalability, that is, the reduced speed of transactions and the high amount associated with charges for transactions, the lightning network was created.
At a time when banks didn’t exist, cash was stored at home. With the creation of banks, people started saving money in the bank as it is safer and more accountable but, with the increased usage by public and organizations, most banks began getting exceedingly filled up.
To tackle this problem, atm’s were invented so that those that only want to withdraw doesn’t need to enter the bank; hence, reducing the traffic in banks significantly.
Now let’s fast forward to the recent time; you don’t even need to have the cash to conduct transactions; all that is required is your credit card. Almost all transactions happen online, and the banks need to manage and keep records of those transactions in their database, making the operation smoother and more convenient.
You still remember the story of the thousand people who order early morning coffees by paying with bitcoin.
What if all the data for each transaction was stored in the blockchain only after the completion of the transactions, let’s say the monthly summary data is stored in the blockchain network.
This will significantly reduce the number of daily transactions the bitcoin network will have to process and confirm daily.
With the lightning network, transactions are conducted faster and smoother while maintaining security, privacy, and decentralization in the process.
Similar to the growth of the financial institution, it can be likened to the atm. Which reduces the number of people that comes into the bank for the transaction.
With the lightning network, the bitcoin network deals with fewer transactions daily and can, therefore, maintain a fast transaction that it had when the volume was not this much.
The bitcoin experienced a reduction in processing time due to increased usage, now processing only seven transactions per second and charging a higher fee to process transactions.
If bitcoin intends to hold the dream of been the future of digital currency that will be widely accepted and used, the problem had to be fixed, which led to a search for a solution.
With the lightning network, the workload on the bitcoin network is greatly reduced, resulting in an increased transaction time in the bitcoin network and also creating a secondary micro-payment platform for transactions.
How does the Lightning Network Work?
The central concept behind the lightning network is to allow fast transactions between the users of a particular cryptocurrency off the leading network, and details of such transactions are added only after the completion of such transactions between the two parties.
Suppose I have to make payment for a particular service every week for four months, with lightning network, the details of such transaction is kept between the two parties in the form of a smart contract containing the signature of both parties and each having a copy.
It is only after four months that the overall summary of the whole transaction is added as a block to the blockchain. That is a straightforward illustration, but there are quite a few processes involved. These processes include:
- One of the two parties is required to set up a multi-signature wallet. This wallet will be the storage and intermediary for the transaction between the two parties. Each party is required to send an amount of the cryptocurrency to be involved in the transaction to the multi-signature wallet.
- The multi-signature wallet address is saved to the public blockchain network, clearly indicating in the smart contract the amount belonging to each party. In case of the mutual dissolution of this contract, the remaining amount for each party is returned.
- Once this wallet is registered on the blockchain network, both parties can now complete unlimited transactions without the data for each transaction reflecting in the ledger registered I the public blockchain network.
- With every transaction, both parties are required to sign the updated balance sheet to ascertain the amount belonging to each party. For instance, if initially, party A has transferred 3 Btc into the multi-signature wallet, and Party B transferred 1.5Btc. If party A was required to transfer 0.5 BTC for the first transaction, then the signed balance sheet will update the amount owned by Party A to 2.5Btc, and the amount for Party B as 2.0 BTC.
- Now comes the exciting part; the signed balance sheet isn’t uploaded to the blockchain network as this will result in the same thing the lighting network was to fix. Instead, a copy of the signed balance sheet is given to both parties to serve as proof of transaction; this is similar to the receipt we receive from the shopping mall that signifies the purchases that were made and the payment involved.
- If there is a dispute or on completion of the deal, a copy of the final signed balance sheet will be presented to pay each party back the proper amount of crypto coin. This is the ledger that is uploaded as a block to the blockchain. It is more like skipping all unnecessary data of other transactions made in the deal to the one crucial part, which is the total volume involved in the agreement and how much was transferred between both parties.
With the lightning network, crypto users get to conduct transactions between one another faster and also reducing the charges involved in the course of the transaction.
With the utilization of the smart contract, it is impossible to cheat or scam the other party as the signature from both parties is required to complete a transaction and, therefore, still maintaining the integrity, privacy, and security of the blockchain network.
Who Created the Lightning Network?
The whitepaper for the lightning network was released in 2016 by Joseph Poon and Thaddeus Dryja.
The network was launched in 2018 and was open to being tested on the bitcoin network. ACINQ is the company behind the implementation of the lightning network; the company is head by Pierre-Marie Padiou.
Lighting labs handled the first lightning network implementation, Olaoluwa Osuntokun is the current CTO of the company.
The lightning network was created due to the slow processing rate of the bitcoin network, which is currently the most used cryptocurrency, which dropped to 7 transactions per second due to the increased traffic on the network.
Can you invest in the Lightning Network?
Investing in the lightning network means investing in the base cryptocurrency, bitcoin for now, and the company behind the lightning network, Stellar.
You cannot invest directly in the lightning network as it is only a micro-payment network set-up on a primary system; however, investing in the primary network is an indirect investment in the lightning network.
The Stellar network, which is in connection with the bitcoin lightning network, is also a secondary way to invest in the lightning network.
The stellar network can process 4000 transactions per second, and the fee for processing 400,000 transactions on the network is relatively cheap.
Compared to bitcoin’s recent processing rate of 7 transactions per second, the lightning network is a massive upgrade, and it offers the fastest transaction processing rate.
Is the Lightning Network only for Bitcoin?
The lightning network is in the testing phase and, therefore, is currently being tested on the most used cryptocurrency in the world, Bitcoin.
If the lighting network can succeed in the bitcoin network, it will work on other cryptocurrency networks with fewer users.
Bitcoin currently possesses the highest usage in the cryptocurrency world and, therefore, experiencing the problem of scalability the most. If the project passes the test stage, it will be made available to other cryptocurrency networks.
But it is only logical to run the first test on the network mostly affected by the scalability problem, Bitcoin network.
So the answer to if the lightning network is made for bitcoin is NO, the lightning network is made for all cryptocurrencies but is currently in the test stage on the bitcoin network.
Bitcoin Lightning Network Stats
According to 1ml, the Bitcoin lighting network currently has a total number of 10,125 nodes and 35,180 channels.
Only 5,842 of these nodes have an active channel, and for every 24 hours, 10 new nodes are being added to the network. Also, for every 24 hours, 90 new channel is added to the system, the channels have an average channel capacity of 0.023 BTC and an average channel age of 214.7days.
The lightning network has a current network capacity of 817.62 BTC, the network charges a median base fee, and fee rate of 1.0 sat, and 0.000001 sat respectively. Below is a general overview of the stats of the lightning network:
- Number of Nodes: 10,125
- Number of Channels: 35,180
- Network Capacity: 817.62 BTC
- Node Countdown: 989,875
- Nodes With Active Channels: 5,842
- New Nodes Added Every 24 Hours: 10
- New Channels Added Every 24 Hours: 90
- Channel Countdown: 964,820
- Nodes with Public IP: 3,629
- Updated Nodes Every 24 Hours: 227
- Updated Channels Every 24 Hours: 24,498
- Capacity Countdown: 999,182
- Average Channel Capacity: 0.023 BTC
- Layer 1 Capacity Ratio: 0.003893%
- Average Node Age: 313.0 Days
- Average Channel Age: 214.7
- Average Channel Per Node: 12.04
- Median Base Fee: 1.0000000 sat
- Median Fee Rate: 0.000001 sat
What are the Pros and Cons of Lightning Network?
The lightning network is a new transaction network and still in the testing stage, has few modifications to reach the full potential, and gives its user the smooth and fast transaction they desire.
The pros and cons of the lightning network:
What are the Pros of the Lightning network?
- The peer-to-peer transaction is smoother and faster. Compared to the primary network, the lightning network is built on; it provides more accessible and quicker transactions while still ensuring there is no central authority.
- The volume of the transaction doesn’t affect the speed of the network. No matter how small or large the cryptocurrency involved is, it will take the same transaction time. Also, there is no quantity limit to the cryptocurrency that can be deposited in the transaction; it can be as low as possible.
- Another key advantage the lightning network poses apart from the speed of the transaction is the cheap fee associated with each transaction. Using the test cryptocurrency bitcoin as an example, the price associated when transacting with bitcoin on the lightning network is extremely low as compared to the primary bitcoin network.
- Transactions on the lightning network are very secure and private. Details of the transaction are kept between the parties involved, preferably until the contract is dissolved or completed. The details of the transaction are not available on the blockchain. Therefore, it is not open to the public until the deal is completed or mutually ended by both parties.
- It reduces the risk of scams during a transaction. The before feared risk of engaging in the peer-to-peer transaction is handled with the use of smart contracts in the lighting network. A mutual signature with the use of the user’s private key must be provided before the balance sheet can be updated for each transaction. Also, once the contract ends, the proof of the last signed balance sheet is used to pay both parties the appropriate amount.
What are the cons of the Lightning Network?
- The first and foremost disadvantage of the lightning network is that transactions can be conducted offline. This can result in a delay in transactions if one of the parties can’t access the internet.
- Currently, the lightning network can only handle small to medium-sized transactions. It is not advisable to carry out heavy-sized transactions on the network as the network was designed to handle micro-payments. Modifications to the size of transfer might be made as time goes on and when other cryptocurrencies are utilizing the network.
- There is fear that the transaction on the network might not be so private. Since the details of this transaction are carried out off the main network, then the main network doesn’t get to track them, and privacy issues might arise due to this.
- Since the lightning network works with a multi-signature, there might be a delay in the transaction if one of the involved parties is unresponsive.
Final Thoughts on the Lightning Network
The Lightning Network is an exciting addition to the crypto space.
The question I want to leave you with is, Are the Cons worth it? It will help the space but could lead to some major vulnerabilities.
Maybe it will be better to leave Bitcoin as a store of value or for large purchases like cars and homes. While other currencies like Litecoin or Energi are used for everyday transactions like coffee and groceries.
Time will tell but for now I’m excited to see where this leads the crypto space.
Be sure you are taking care of the storage and your privacy while getting into the crypto space. If you are not sure where to begin take a look at our Battle-Tested Crypto Tools that we recommend for some of the most trusted tools available.