What is the Lightning Network?
Bitcoin is the original cryptocurrency, it has a massive community of users and contributors that help the network stay robust, secure and active. But by having such a large network, there can be some growing pains on the Bitcoin blockchain. One of them is the backlog of unconfirmed transactions that can build up when the network usage spikes.
We saw this in late 2018 when Bitcoin was at its price peak and everyone was buying into the cryptocurrency. As more people used the network, more people wanted their transaction confirmed first, and as each Bitcoin block has a limited size, transactions can only be confirmed in small groups. People that wanted their transaction confirmed first paid more, driving up the average network fee to be in dollars rather than cents.
As Bitcoin is not an immutable software, a team of contributors have been working on an addition to the network to allow more transactions to be confirmed more quickly and at a fraction of the cost. This is the lightning network, a layer built on top of the Bitcoin network to help Bitcoin scale to the same usage that VISA and other electronic payment systems experience which can be up to 50,000 transactions a second (Bitcoins current capacity is 7 transactions a second). It enables users to create payment channels between any two parties on that extra layer which are kept off the main network, allowing near instant, feeless transactions.
How does it work?
The lightning network can be difficult to understand from a technical point of view. Here is a simplified version of how it works:
Two people open a ‘channel,’ a multi-signature wallet is set up and holds some amount of Bitcoin that one or both channel parties have deposited. Now that this payment channel is set up, unlimited transactions can take place without the transactional information stored on the Bitcoin blockchain.
After each transaction, both parties automatically sign an updated balance sheet to determine how much of the Bitcoin in the multi-signature wallet belongs to whom. It is important to note that this balance sheet is not stored on the blockchain, both parties simply keep a copy of it.
Now this may seem cumbersome that anytime you want to pay someone through the lightning network you have to set up a channel and a multisig wallet etc. However with the lightning network, you can route your payments to someone else indirectly as long as you have a channel in common and both channels have enough BTC. When we see large scale adoption of the lightning network, it won’t be hard to find an indirect channel to anyone else in the world. You can see the current channels in this lightning network explorer.
Why is it good for Bitcoin?
The basic idea behind Lightning network is that not all the transactions are necessary to be recorded on Bitcoins blockchain. As Bitcoins blockchain has limitations on transaction size, speed and confirmation time, the lightning network turns Bitcoin into a fully fledged digital currency for the age of the internet. Able to make microtransactions of less than a cent with virtually zero transaction fees.
This opens up a whole new world of internet payment solutions, imagine paying 0.01 cents to read an article on the New York Times website rather than paying for the yearly subscription when you really don’t visit enough to justify the cost. This is one of the many things the lightning network can allow.
For more information on the Lightning Network, we recommend watching this video: https://www.youtube.com/watch?v=rrr_zPmEiME