Blockchain technology is gaining momentum by auguring its various applications and use cases. We are entering a unique era in the timeline of the world's first and most renowned cryptocurrency, Bitcoin.
Bitcoin provides a low-cost method for sending remittances globally and serves as an alternative store of value. The Bitcoin network replaces financial intermediaries with computer code built on a decentralized ledger known as the Blockchain. Without the need for financial middlemen, Bitcoin has undoubtedly changed the dynamics of exchange for individuals and businesses worldwide.
Despite all its upsides, Bitcoin has some technical issues, such as slow transaction speeds and data-intensive network operations.
Bitcoin transactions require up to six subjective confirmations by the miners and nodes, depending on the amount transacted. This confirmation process can take a considerable amount of time. As the cryptocurrency ecosystem expands, the number of Bitcoin transactions will increase, resulting in network congestion. This affects transaction fees, confirmation times, and scalability of the Bitcoin network, especially for on-chain micropayment transactions.
The Lightning Network, an off-chain solution, addresses these problems. The Lightning Network settles transactions at nearly the speed of light. Handling all transaction amounts off-chain, this scaling solution expedites and reduces costs for micropayments. Lightning users can quickly pay for a cup of coffee with minimal transaction fees. The Lightning Network provides an effective off-chain scaling solution for Bitcoin, reducing costs and increasing transaction throughput and settlement speed.
Let's take a closer look at the Lightning Network to understand better how it operates, has additional functionality, and tackles the scalability downside of the Bitcoin mainnet.
Lightning Network Explained
The Lightning Network is a bidirectional layer 2 side chain that utilizes two-party payment channels to enhance transaction speed and throughput and also adds smart contract functionality to the Bitcoin network.
A layer 2 network is a separate network or application built on top of an underlying network or application called the Layer 1.
Scaled Blockchain networks should be able to handle millions or billions of transaction throughputs, also known as TPS (Transactions Per Second). In turn, because miners, computers that secure and verify transactions on the network, do not typically validate smaller transactions quickly, a scaled blockchain should also process all transactions quickly and efficiently regardless of the size or amount. Lightning network smart contracts automate this process, and transactions are only written to the Blockchain when lightning payment channels are finalized and closed.
Next, let’s understand how the Bitcoin Lightning Network (BLP) operates and the additional use cases it provides to Bitcoin.
How Does the Lightning Network Work?
The Bitcoin Lightning Network enables the creation of peer-to-peer payment channels using the Bitcoin Blockchain for initiation and settlement. To create a Lightning channel, an initial transaction called the ‘Funding Transaction’ is paid into the channel in Bitcoin (BTC) by one or two parties.
After the Lightning channel has been initiated, the parties involved are each given two sets of keys. The first key is typically held until the parties decide to close the Lightning channel. The parties exchange the second key to validate their 'Spending Transactions'.
The two parties can then conduct unlimited, disinter-mediated spending transactions between their lightning nodes and other nodes in the Lightning network.
Strike is one practical example of a platform that utilizes Lightning technology. Built on Bitcoin's Lightning Network, Strike - a digital Bitcoin payment platform - enables sending micropayments anywhere in the world, from your favorite restaurant or tipping from your socials like Twitter.
Main Benefits of Lightning Bitcoin Network
Instant Payments: Due to its ability to initiate Hash Time-Locked Contract (HTLC) multi-signature transactions without creating an on-blockchain transaction, the transactions are carried out instantly through lightning channels.
Scalability: Due to the ever-growing number of Lightning payment channels, the network can handle millions and billions of transactions per second indiscriminately.
Low Cost: By eliminating mining fees and settling transactions off-blockchain, the Bitcoin Lightning Network significantly reduces costs, and network fees are surprisingly low.
Cross Blockchain: Cross-chain atomic swaps from an entirely different cryptocurrency can be facilitated by smart contracts. It is feasible to conduct transactions across Blockchains without intermediaries if the chains use the same cryptographic hash function. This allows for peer-to-peer decentralized cryptocurrency exchanges without needing a centralized authority.
In Conclusion
Human ingenuity coupled with a decentralized, open, and permissionless network of programmable money has created incredible functionality that delivers compelling utility to merchants and crypto users. Quoting Zap & Strike's CEO Jack Maller, the Lightning Network can be “One of the more impressive advancements in money as a technology in human history.”
As the Bitcoin protocol continues to grow, a small volume of Bitcoin transactions can be offloaded to the Bitcoin Lightning Network, freeing up space on the Blockchain and reducing network congestion. This innovative remittance Blockchain network is becoming less cutting edge and more of a necessity for efficient financial transactions.
What are your thoughts? Do you fancy the prospect of having a Lightning node any time soon?
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