Bitcoin was created to be a form of digital cash that can be used to pay for goods and services. While it served this function for a while, things became complicated when the number of transactions began to grow as the number of users increased.
This led to congestion on the Bitcoin network, slowing down transaction speed and increasing transaction cost significantly. You don’t want to use a slow system to make instant payments at a high cost, so there was a need to increase the network’s speed. However, There was another problem.
Bitcoin had a small block size, which means it couldn’t process more than seven transactions per second. Increasing the block size would have done the trick, but developers didn’t deem it wise because it could compromise the security of the network.
Instead, they came up with an idea to create another network that can be used to settle transactions quickly at low cost without compromising Bitcoin’s unmatched security. This network is today referred to as the Bitcoin Lightning Network.
What is the Bitcoin Lightning Network?
The Bitcoin Lightning Network is a second layer for Bitcoin (BTC) that uses micropayment channels to scale the blockchain’s capability and handle transactions more efficiently and more cheaply. The network facilitates off-chain transactions, more like a flyover bridge over a crowded traffic area.
The network doesn’t only make transactions faster, it also reduces the excessive energy use of the Bitcon network. The idea was first proposed by Joseph Poon and Thaddeus Dryja in 2016, and has since been under development.
How Lightning Network Works
The network uses channels between users to facilitate multiple transactions without going through the main Bitcoin blockchain that is usually congested. Two users only need to open channels through which they can send and receive multiple transactions before closing the channel.
The transactions only go to the main Bitcoin network after the channel has closed, by which time the transactions have been completed and the parties involved have settled the process with lightning speed.
It’s no wonder that Lightning Network has been well received among bitcoin users. Although the adoption was initially slow because the process sounds quite technical, the number of BTC on the network now stands at over 5,000, indicating that many people are opting to use the technology for settling Bitcoin transactions.
Issues with Lightning Network
As much as Lightning Network is needed for faster Bitcoin transactions, reduced energy consumption, and lower transaction fees, it also came with some issues. The first is that it could lead to some form of centralization, which is something that Bitcoin developers frown at.
Businesses that invest in Lightning Network nodes may become centralized nodes in the network, just like banks in the traditional financial system by having more open connections with others. Other issues with the technology are concerns about fraud, fees, hacks, and price volatility.
Fraud can occur when one party closes the channel and the other broadcasts a false transaction to the network. Fees can also be a concern when using the Lightning network. This is ironic, since the technology is intended to reduce transaction fees as one of its cardinal objectives.
What happens is that, because of the tendency for fraud, there are node operators who mount surveillance on transactions to ensure that fraud doesn’t happen. Such node operators also charge their own fees in addition to the regular fees attached to Bitcoin transactions.
The network is also vulnerable to attacks such as hacks and thefts, just like any payment channel or wallet can be hacked, leading to loss of funds. Malicious actors can also launch an attack on the network, thereby causing congestion and stealing users’ funds in the process.
With all these issues though, Lightning Network has helped to improve the Bitcoin Network and is still being improved upon, so the technology has a bright future.
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