Updated: Jan 20
The lightning network (LN) is a second-layer payment protocol applied to bitcoin. It ensures transactions are conducted more efficiently by using micropayment channels in scaling its blockchain’s capability. All the transactions completed on lightning networks are generally cheaper, faster, and confirmed more readily than the ones conducted on bitcoin's primary network. It disintermediates most transactions in today’s world that are routed by central institutions like banks.
The LN was intended to reduce congestion on the bitcoin blockchain and lower the associated transaction fees by making each transaction off-chain from the main blockchain. It’s also used when conducting other types of off-chain transactions that encompass cryptocurrency exchanges. For instance, it’s critical in facilitating atomic swaps that usually allow the exchange of cryptocurrency for another without the involvement of intermediaries.
The Current State of This Network
The lightning network was first proposed in 2015 by Joseph Poon and his colleague Thaddeus Dryja. Since that time, the lightning network has been under development constantly. By introducing the off ledger transactions, the lightning network has become the solution to the issue of speed on the bitcoin blockchain transactions.
In March 2018, the network encountered an attack of distributed denial of service, which took down about 200 lightning nodes (around 20% of the network by that time). This led to challenges in processing transactions, but after preventive actions were implemented, its growth hit 7000 nodes.
Since then, the network has experienced substantial growth, and the September 2020 updates showed there are about 13,900 nodes and more than 37,000 operating channels. Currently, the lightning network has a total network capacity of 1098 BTC (about $11.4 million).
The lightning network's overall capacity has grown by 40% in the past year, and each channel capacity grew by 22%, hitting $331 over that period. In most cases, this network still remains on limited use due to the lack of pathways for particular transactions.
Money transactions are facilitated by the nodes' interaction, while the channels are typically the highways where the money is moved throughout the network between the nodes. An increase in the number of nodes enhances easier and more successful completion of larger transactions.
How the Lightning Network Works
Currently, the transaction validation processes usually use mining rigs that require computers to first solve complicated math problems before the recording of the transactions on the blockchain ledger. So, one transaction may take up to an hour to confirm because of the computing power needed. Multiplication of the transactions on the bitcoins network makes their approval and storage very expensive and consumes a lot of time.
These processes are significantly sped up with the lightning network. It demands from its participants to correspond via transactions on separate offline channels, and then the blockchain updates to reflect the external transactions. Thus, the middlemen of the mining rigs or digital wallet providers are entirely skipped.
However, for it to become the medium used all over for daily transactions, bitcoin should have hundreds of thousands of transactions running within a second, as in the case of electronic payment networks and credit cards. Bitcoin is burdened with such problems in its current state due to the decentralization of its technology that needs consensus from all the network’s nodes.
The validation process of bitcoin transactions will significantly facilitate the improvement of the technology behind the lightning network.
How to Use the Lightning Network
The creation of the second layer on bitcoin’s main blockchain was a proposal by the lighting network to provide a solution to the scaling problem. This layer has multiple payment channels between the users of the network.
Now the lightning network is typically a transaction mechanism between two users on the channels; they can receive or make payments from each other easily.
The users usually open the payment channels that are multi-signature wallets. The amounts of bitcoins sent between the two users are known as Satoshis. The transaction isn’t settled on the bitcoin blockchain, so there's only a small fee or no cost at all for the transaction. The opening and closing of the payment channel create a bitcoin transaction.
Here are the crucial steps of making a payment with the lightning network.
Get a lightning network-enabled bitcoin wallet.
A bitcoin wallet lets you hold, receive, and spend bitcoin via the lightning network and on-chain. Wallet of Santoshi, Éclair, and the Blue wallet are recommended for an exceptional mobile experience. They can be downloaded either via the Google play store or the Apple app store.
Move bitcoin into your wallet.
You will need to buy bitcoin if you do not already have some in your wallet. Before choosing an exchange, consider doing some research because every region and country is different. Examples of exchanges include Kraken, Coinbase, CashApp, etc. Create two wallets if you’re using Blue wallet; the regular (on-chain) wallet to receive your bitcoin from your store or the exchange and the lightning network wallet. In your Blue wallet app, select the lightning wallet, tap on manage funds to refill from the on-chain wallet, and set the amount you want. You’re now set to make any payments over the lightning network.
To make a payment, open your wallet, scan the QR code, or click the 'open in wallet.' Make sure to confirm everything is correct, and then proceed with your checkout.
The other party must open a channel with you to receive any payment, or one of your existing channels must be emptied as the lightning network cannot have more than the original bitcoin transaction. Head to the ‘channels’ section to view how much you can receive. Enter the amount and a label to know later who paid a particular invoice. Proceed to generate the payment request.
Are People Using the Lightning Network?
For some time, many companies and developers have anticipated the launch of the lightning network. The network developers indicated that its speed would enable it to be used anywhere instant payments are required, including any retail point of sale terminal with user device-to-device transactions. The lightning network would consequently help bitcoin to be more competitive with the other instant payment platforms. Also, it revolutionizes the way peer-to-peer payments are usually transacted.
Before sending any real money, it’s recommended that you first learn about the network through bitcoin’s testnet.
This is a clone of bitcoin’s network where coins do not have any value. You easily experiment with a given software and make your transactions without worrying about your money.
You may be asking yourself what people do with the bitcoin lightning network. Well, you can make a payment to anybody with a lightning wallet set up. However, the lightning network covers more than that! Surprised right? This is a digital currency, and it’s easily integrated into various websites without involving any third party.
The number of platforms adopting the lightning network is growing steadily, with cryptocurrency exchanges, casinos, and many other service providers currently operating on the network. People use the lightning network to buy domino’s pizza (lightning pizza) instead of using their credit cards. Also, they use it to tip somebody on Twitter via the Tippin.me integration.
The lightning network was described by the founder and CEO of Gatecoin as a game-changing innovation, who claimed that it enables instant micropayments using cryptocurrencies like bitcoin through smart contract technologies.
Generally, it allows all transactions utilizing bitcoin to take place instantaneously. The lightning network was initially designed for bitcoin, but it's being developed and adapted by other cryptocurrencies such as Ether, Litecoin, Ripple, and Stellar. We support this technological advancement that will boost the mass adoption of cryptocurrencies in the future. The lightning network will help in overcoming the scalability issue of bitcoin and make a significant number of individuals switch to it. In addition, we also see it becoming bitcoin’s peer-to-peer payment layer in the future.
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