What Is Bitcoin Lightning Network And How It Works | Guide for Beginners

Lightning Network is a second tier solution that addresses the problem of bitcoin scalability. The Lightning Network (LN) was launched in March 2018, and over the past three weeks it has tripled its bandwidth to 300 bitcoins. Today we will learn what a Lightning Network is, how it works and how it can become an integral part of the future of Bitcoin.

The problem of scalability Lightning Network

Scalability means the ability to cope with increasing transaction demand, and for a Bitcoin network, the ability to load more transactions into blockchains to serve the maximum number of users per unit of time. There are about 22 million Bitcoin wallets in the world. Given that users have multiple wallets, this is a very small percentage of the world’s population. Bitcoin was invented to become digital money, and even global currency – so that the whole world could use it. Therefore, the Bitcoin network seeks to solve the problem of scalability in the early stages of development of the coin to its wider acceptance.

How do you use lightning networks?

An off-site solution means that most bitcoin transactions will not be written to the main registry, but this will be done on a third-party network that runs in parallel. This can be done with the help of multi-signed wallets technology. Multi-signature wallets were originally designed as an additional layer of protection for one or more users who would like to pool funds without having to trust each other. It’s like a joint bank account where you need signatures from both sides to withdraw money. You can create multi-signature wallets that require two out of three keys, or even fifteen out of fifteen.

Lightning Network what is for begginers?

The Lightning Network is a second tier solution, invented in 2015 by Joseph Boone and Tadeusz Drizhey, and has continued to evolve ever since. It allows for a significant increase in the scalability of bitcoins, allowing the network to conduct millions of transactions per second.

How does it work Lightning Network?

The main elements of the network are two-way payment channels. Payment channels are the updated kind of multi-subscription purses which, as a matter of fact, are similar to usual accounts. Both parties must open a payment channel with a transaction in the main Bitcoin network, which initiates the introduction of the first deposit into the channel.

Suppose Bob and Jim play backgammon for bitcoins. In each game, they bet 0.01 Bitcoin. If, after each game, they would have to settle in the main Bitcoin blockchain, they would have to wait at least 10 minutes each time for the payment to be received before they could continue with the next round.

In addition, the commissions would be relatively high because there are a lot of transactions going on in the network (there is a significant demand for transactions). To somehow resolve this situation, they open a payment channel, and both put 0.05 bitcoins there, performing only one transaction in the main network; these payments will be displayed on their LN balances.

Let’s say Bob won the first game and Jim needs to give him 0.01 Bitcoin. Since it’s a third party network, they just need to update their payment channel by having Jim transfer 0.01 bitcoin to Bob.

Then Jim wins three times in a row. Between each game, a transaction is made in the payment channel, and now the balance of payments will look like this:

The payment channel can be closed at any time and then the last transaction data can be simply transferred to the main network. This last transaction will reflect all previous transactions that were made in the payment channel. Actually, the update of multi-subscription wallets is connected with replacement of digital signatures of transactions on blockchain with signatures in the payment channel (after all transactions in LN are made). Now that the lack of trust has been overcome, you need to transfer the transaction to the main network.

You have seen how payment channels work. But is it Lightning Network? The answer is no!

The main feature of Lightning Network is the possibility to direct money through payment channels. Suppose a person wants to buy a cup of coffee at Starbucks, but he does not have an open payment channel for this company. Fortunately, he has an open channel for his friend, and his friend has an open channel for his mother, and his mother has an open channel for Starbucks. Thanks to Lightning, this man can still buy coffee by sending his Bitcoins to Starbucks through his friend’s and his mother’s channels.

Coin routing has certain characteristics/limitations:

  • Payment must be made through payment channels that contain at least the transfer amount. In the example above, if a cup of coffee cost 0.00015 bitcoins and the friend/mother only had 0.0001 bitcoins on the channel, the transaction cannot be made through these channels.
  • Routing of funds through existing payment channels may include a fee for the transfer of funds (negligible) on any or all of the channels.
  • Confidentiality. The participants of the channels through which the payment passes know nothing about the transactions made – except for those people who send funds and receive them. In the above example, a friend’s mother knows nothing about the transaction (unless her son tells her so) – just as she shouldn’t know that the payment is being sent to Starbucks or “onwards”. It also makes it difficult to keep track of the consumer habits/ preferences of users by anyone (e.g. large internet companies who want to know almost everything about you).

The above features are exactly what makes the LN network revolutionary, although it was a simple example of a rather limited number of open channels. Imagine now how Lightning can work all over the world:

Such a network allows you to channel money through Africa to South America or through Europe to the United States in such a fast and efficient way, and millions of users can use the network simultaneously.

Advantages and disadvantages of the Lightning Network

The Lightning network offers five major advantages over the main Bitcoin blockchain network

  1.  Improved anonymity. This is something that helps to avoid the control of user habits (preferences) by third party stakeholders/companies. It also means that no one will be able to determine that a particular wallet belongs to a particular user, as not all transactions are recorded in the main blockchain.
  2. Low costs. There are two types of costs. The first is the cost of the commission, which in LN will be insignificant compared to the current commission of the blockchain itself. The second is the load on the main network, which should also be considered as a cost/costs: if LN is used, the load on blockchain is significantly reduced.
  3. Higher speed – Lightning transactions are instantaneous and do not require network-wide approval, as is the case with major Bitcoin network transactions.
  4. Nanopayments – LN allows transactions of 100 satoshi (0.000001 bitcoins), but the same transaction in blockchain will be accompanied by a fee exceeding the cost of the transaction itself. Thus, Bitcoin in the Lightning network really turns into digital cash and allows to transfer very small amounts in the form of payments.
  5. Scalability. LN should not be regarded as a “final solution”, as the network has enough problems that are related to access and improvement of user-friendliness. The scalability of the network has yet to be significantly improved, which should also lead to a significant increase in the number of users.

However, the Lightning network also has some disadvantages compared to the core network

Disadvantages Lightning network

  • Anyone, who is interested in the payments of Lightning, should connect to the network and send a “payment request”, while in the bitcoin itself it is possible just to specify the address of the purse or provide a QR code.
  • Storage of money in Lightning means its storage in a “hot” purse, and that’s why the level of security is slightly reduced.
  • To overcome some security problems, users should “listen” to the network and monitor transactions in their open channels.
  • Probability of centralization. The desire to send payments through the LN network can lead to the opening of “payment centers” (hubs). These can be Lightning nodes with multiple open channels that allow people to make payments in exchange for commission. These nodes may look “like banks”, however:
  • Unlike banks, there are no barriers to entry, and everyone can open a payment channel and compete with others;
  • Lightning is not a replacement for the main network, so if someone needs to buy a camera on eBay at a relatively high price, they’re more likely to choose a transaction on blockchain than on LN.

In its current form, the LN network is almost completely decentralized. However, with the widespread use of the network, when there are payment hubs, the degree of decentralization will be reduced (albeit slightly).

Lightning Network is about creating a new ecosystem

Payment hubs can be considered a drawback of LN from the point of view of centralization, although in fact they represent an advantage, because they stimulate the launch of Lightning nodes.

People who believe in bitcoins and store them in their hardware wallets (walkers) can accumulate interest by opening payment channels and placing their bitcoins there. The use of channels can bring them commissions in the form of a certain amount of satosha. It is important to emphasize that this “percentage interest” of LN nodes actually represents the minimum commission within this network, paid by those people who are interested in transactions. However, these tiny transfer fees can increase the profits of the dealers.

Also, the need to “listen to the network” in order to prevent fraud should lead to the development of an integral part of the ecosystem under the notional name of “watchtowers”. This may involve the use of third-party security services in the form of LN nodes with a special algorithm (something similar to mining). These nodes are likely to be paid for if they actually prevent fraud attempts.

Current stage of acceptance

The main LN network was launched by Lightning Labs in March 2018. Currently, there are about 1,900 nodes, and 97% of them have active channels. The number of channels is already over 11,000, and their number is also growing noticeably. The network bandwidth has now grown to more than 300 bitcoins.

Conclusion about Lightning Network

Lightning Network and offline solutions are becoming an integral part of the scalability of Bitcoins and the key to making them real digital money that people can use every day in the future. In the meantime, Lighting Network availability processes, led by renowned developers around the world, are in full swing.

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