Bitcoin is the ultimate cryptocurrency out there, and recently it has enjoyed a very enthralling wave of adoption from all business communities out there. Today you won’t see a big third-party payment processor without the integration for Bitcoin or, thereof, the Lightning network. It is a way of using which people are able to complete their crypto transactions in real-time and convert fiat currency into crypto and vice versa.
What is the Lightning Network?
Bitcoin is the flagship cryptocurrency which means it was the first crypto to be ever designed and put out in the market for trading. The initial model for Bitcoin was that the transactions could only take place on the blockchain, which means Bitcoin to Bitcoin transactions were allowed, and any other cryptocurrency that came after Bitcoin wasn’t included within the list. This lack of compatibility was an extreme issue for the users because then they had to convert their crypto into Fiat currency and their Fiat currency into Bitcoin; the process was long, inconvenient, and extremely frustrating, to say the least.
This is where Bitcoin came forward with the solution in the form of the Lightning Network, and it is a secondary layer that was then added to the blockchain of Bitcoin, which allows users to be able to perform transactions in other cryptocurrencies. Therefore people are able to perform different transactions between the third party payment processor and altcoins that are not primarily located on Bitcoin’s blockchain network.
The second layer is the union of Bitcoin blockchain, third-party payment processors, and altcoins, and all of these together make up the Lightning network. It is a two-way stream, a Lightning network, which means that the involved parties could easily make transactions between each other that include both sending and receiving payments. The mainnet of Bitcoin is dedicated to receiving and sending payments in Bitcoin, but the second layer, which is the Lightning network makes it easier for sending and receiving payments that are not primarily sourced in Bitcoin.
This enhances the scalability of the Bitcoin blockchain and, in doing so, enables users to come together at a platform that can send and receive crypto payments minus the Fiat hassle. If the scalability settings are taken care of in a dedicated manner, then the single blockchain network would be able to handle millions of transactions taking place in a single second. With the Lightning network, the processing time is cut significantly, and micropayments become more manageable and instant, and as another added benefit, the Lightning network charges only a minute fee.
Despite the fact that lighting networks seriously provide the users with a platform to perform all the transactions, there are still a number of shortcomings that it has to beat; some of these are low routing fees and consistent malicious attacks. When a channel is established to send or receive payments universal fee has to be paid for its development, and then a small number of fees in a consistent manner is given to either keep the payment channel open or close it for good. Other than these small fees, there are routing fees to be considered because these are given to the nodes that are in charge of validating these microtransactions.
These routing fees are so small; why a node or a miner would agree to validate the transaction in the first place is the question that arises. The very answer to this question is that no miner would ever go out of their way to validate transactions that are so minute in nature because they are not really getting anything out of this. Therefore a trader has to pay the fee, and the time for the transaction to get through is also extremely long. As for the malicious attacks, it is possible for other people to get ahold of multiple payment channels that are present/open at the same time and then close it all at once.
To sign off the closing request, all of these channels are then to be validated by network nodes which come in the way of the legitimated validation (of transactions with significant volume), therefore seriously affecting the performance and capability of the blockchain to carry out the validation as the network gets extremely busy. During this time when the network is extremely busy, an attacker can just pull tokens from these channels before the validating nodes or legitimate parties involved even become aware of the situation.
A Brief History of Lightning Network
Lightning Network was not a dedicated part of Bitcoin’s blockchain from the get-go; this came later in the form of an update and was proposed actually in 2015 by two distinctive researchers by the names of ‘Thaddeus Dryja’ and the ‘Joseph Poon’ as they made the discovery visible in their paper by the name of ‘The Bitcoin Lightning Network’.
The findings proposed in this paper were based on the conversations released by the fellow developer of Satoshi Nakamoto for Bitcoin in 2013 as Satoshi filled in Mike Hearn on the relative ways of payments and getting on with crypto transactions that are not primarily sourced in the form of Bitcoin.
The paper made clear the idea of an off-chain algorithm or protocol which would be made of different payment authorities and channels using which two dedicated parties that don’t trust each other could transfer assets from one place to another without making the main Bitcoin blockchain riddled with such small transactions.
The whole idea behind this concept was that it could take place off-chain. Visa, a payment processor, was taking care of 47,000 transactions taking place in a single second, as verified by Dryja and Poon in the holidays of 2013. If the same concept was to be applied to Bitcoin, then it would have to incorporate about 8GB of data in a single block regarding the network transactions.
That was not anywhere near the current compatibility of Bitcoin’s blockchain at the moment as it could only take on transactions that were either 300-bytes or less in size, and each block could only have a 1Mb of data in it. The per second transactional volume of Bitcoin was only seven which meant that it could only take on seven transactions in a single second.
Later on, in 2016, both these researchers went on to develop Lightning labs which is a dedicated company in charge of developing the Lightning Network for Bitcoin. The network became a reality in late 2017, and the protocol was finally ready and compatible with the Bitcoin network in all its entirety which meant that microtransactions could now be placed and executed in real-time.
In 2017 another Bitcoin-related update was made available, which removed an extremely annoying and frustrating bug from the network known as transaction malleability. It was extremely annoying for the network handlers because the bug allowed the users to be able to lie to the network about performing certain transactions and while keeping all of the Bitcoin tokens within their wallets.
From the get-go, people were able to develop apps on the Lightning network, and this included wallets and other dedicated platforms that could handle microtransactions taking place on the Lightning network. After careful testing and evaluation of the project, later in 2018, the company was able to put forward a beta version of the Lightning Network protocol, which was tethered to the Bitcoin main blockchain.
This is the time when people who are considered extremely enthusiastic regarding cryptocurrency and Bitcoin, such as Jack Dorsey, became associated with the Lightning project, and he was really keen on the operation and mechanics of this whole thing. Jack Dorsey admired Lightning networks so much that he acquired a group of professional developers to focus completely on the development of the platform, and he even paid them in Bitcoin. He also made a commitment to make the Lightning network a part of Twitter in the future, which proved how significant the Lightning network was for Bitcoin and users wanting to perform microtransactions.
Working Principle of the Lightning Network
The bitcoin blockchain is a simple peer-to-peer payment system that incorporates and applies to all parties involved in these transactions. This means that anyone who wishes to take part in any Bitcoin transaction will just go to the Bitcoin blockchain and perform the transaction or become part of one. But the working of the Lightning network is a bit specific. It works by implementing the peer-to-peer payment protocol between two dedicated parties; it takes the whole thing away from the main blockchain and does it separately.
Think of a convenience store and a customer as two dedicated parties involved in a peer-to-peer transaction using the Lightning network. To begin, a proper channel needs to be established between the two, and once it is established, these can engage in an almost unlimited number of transactions that are almost inexpensive based on the fact that there is only a small fee to pay upfront. The whole thing will be working as its own private Ledger without disturbing the mainnet of Bitcoin or congesting it in any particular way.
After the development of a payment channel, the payer or the person who has to pay the amount would have to stash a dedicated number of Bitcoin tokens into the network. This amount needs to be properly locked and in place; once the whole thing is locked, the recipient can then send an invoice of the outstanding payment, and they will be paid from the amount of Bitcoin, which was initially locked by the payer.
Once a payment channel has been developed, both parties involved will be able to transact with each other on a regular basis. These are not the type of transactions that are held on the main Bitcoin blockchain, and therefore the nature and execution of these transactions are a bit different in the Lightning network. The execution of the transactions taking place between these said parties can take place simultaneously and seamlessly without them telling about the whole thing to the main Bitcoin blockchain.
The very reason is all the transactions taking place on the main Bitcoin blockchain are first approved by all nodes and only then executed; with the Lightning Network, transactions are done differently and in an altered medium which allows for these transactions to take place at Lightning speeds. You can say that the Lightning network eventually is the combination of multiple payment systems out there linked together.
There is no timeline for the payment channel which is developed between these two parties, for the transactions can take place between them indefinitely. They would only have to continue paying the fees, and they would be able to keep the channel open for as long as they want, or when the business is settled between these parties, they could close the channel, which once again incurs a small fee to do so.
After a channel has been declared close only, then all of the information that it carries in terms of transactions is propagated into a single one and is sent to the main Bitcoin blockchain for the sake of record-keeping. The consolidation of these small transactions into a single one allows the nodes to be able to verify the integrity of a single transaction much easier and cost-effectively as compared to various small ones. Because if all these small transactions are stomped on the main blockchain for Bitcoin, then it would definitely get in the way of validating the bigger transactions, which are important, thus congesting the network and making it unavailable for further activity.
Another aspect that you need to bring into attention is that when the lighting networks develop a payment channel between two parties, it also creates a potential smart contract between them. The rules of the agreement are coded within the contract and, once accepted by both parties, cannot be changed or manipulated in any possible way. The development of a smart contract ensures that the fulfillment of this will be autonomous, and once the very terms of the contract are met, the funds would be released, and there would be absolutely no need for an intermediary or a broker of any kind.
After the validation of transactions, the Lightning network has the ability to anonymize any and every transaction that has taken place on the blockchain. The off-chain Lightning network protocol definitely has its own Ledger, but when it comes to validating the transactions, all of these are consolidated into a single block which is then verified and validated on the main chain of the Bitcoin network.
Benefits of Lightning Network
The first and foremost benefit of the Lightning network is making faster and cost-effective transactions available to the users while allowing them to engage in micropayments on a decentralized platform which seemed quite impossible back in the day. If the very prospect of Lightning network is removed from the main blockchain of Bitcoin, even for a second and all those users who are interested in making small payments would have to pay high fees for these so-called transactions, which would require an hour or even more for all the network nodes to be able to validate the transaction.
The better reason why micropayments have to go through the longest validation time is that the miners out there are more interested in validating bigger transactions because of the fact that they will be awarded handsomely for that. The Lightning Network is tethered onto the Bitcoin blockchain as a separate layer that covers the mainnet through and through. There is another added benefit for the Lightning Network, which is that it can benefit from the security protocols put into place by bitcoin’s main blockchain.
The users also have the feasibility of going to the main Bitcoin blockchain to perform bigger transactions, and when they have to get on with the smaller ones, they can just move everything into the Lightning network and make those transactions happen. The privacy aspect of the Lightning network is also pretty standard which means that an outsider could only get around the information of package within the Lightning network and not the entire series of transactions that took place in a single Lightning network channel.
Think of the bright side here; you don’t have to bring in an intermediary or a broker of any kind for the sake of making small payments in crypto using the securest features offered by bitcoin’s blockchain. Lightning network, without any doubt, was an exceptional and unique system that was necessary for small-time personnel such as payment processors and people who are interested in making small payments using Bitcoin.
It doesn’t let you pay heavy fees, such as many pay using the main Bitcoin network, and it is actually more thorough validating your transactions in a matter of minutes. At the end of the day, it is just great to have total control of every possible aspect of crypto transactions in your own hands rather than depending on an intermediary or crypto exchange.
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