What Is Bitcoin Lightning Network?

Long ago, the money-minded people realised that fake money is unexciting. They soon turned their masterminds towards an online platform that could let them transfer, win or earn real money. Bitcoin moved the internet of things through its easy to use the platform and the accessibility of features it offers, not to mention the real money transactions.

Nowadays, however the tide has turned in the opposite way. The transaction fees have gained a high spike with amount touching $30 (during high demand periods). The Bitcoin obsessed engineers have been finding a good way to avoid or overpass this transaction fees with a safe technological protocol.

Lightening network is the result of all of the hard work put in to solve this problem. Innovated by Thaddeus Dryja and Joseph Poon, the system is a module that can be grafted onto the blockchain of a cryptocurrency. The lightning network was first implemented in 2015 in Australia by Blocksream’s Russel.

Scalability Solution

The Bitcoins scalability, however, is a big issue here.

It offers only 7 transactions per second and the transaction time differs according to the demand which does not make this as an optimum alternative to FIAT.

The bottleneck is its restricted block size of one megabyte and a limited frequency. Compared to its cryptocurrency counterparts — ethereum offers 15 transactions and XRP over a thousand transactions per second; this number can be daunting.

In such a situation, people would unlikely choose internet payments such as Visa and MasterCard that offer a staggering 56000 transactions per second over bitcoin. The bitcoin network lacks a centralized system and depends majorly on a bunch of mining networks, which have hiked up the transaction fees to incentivize their miners because of the rapid growth. The bigshot investors owning mining farms are paying heavily to override and get preference than average jones which would worsen the situations.

One potential solution to the problem of scalability can be increasing the blockchain size. Bitcoin XT and bitcoin classic are the examples of increasing blockchain sizes and frequency.

However we cannot just keep on increasing block sizes every year, additionally, this method would still put a lot of pressure on the blockchain. It is agreed among the crypto space that one such exciting scalable solution is Lightning Network.

What exactly is lighting network?

The lightning network is a proposed system that is made to work on Bitcoin. Its main function is to allow people to perform transactions with ease and by paying fewer transaction fees. This is done by keeping the users off the main network. The lighting network enhances the ease of Bitcoin and allows it to be used as a day to day currency.

The sole purpose of the lightning network is to allow Bitcoin users to create a personal payment channel within the parties involved in the transactions. Through these channels or gateways, payments can be sent or received with minimal or no wait times.

This happens as here Bitcoin transactions are not committed to the blockchain of the Bitcoin. The transactions occur without normal waiting times. The lightning network keeps the record of the transactions but doesn’t finalize them. Later on, a message is sent to the Bitcoin network acting as a normal usual transaction. The message describes the details about the final balances of the channel created.

The overall system is developed to cut down the number of messages Bitcoin has to process on its blocks. Through lightning system, only the important messages converted into final smaller messages are included in the blockchain. Messages are sent in the form of chronological entries. These entries together form the blockchain.

Another significant thing to note here is that all of the transactions done are real Bitcoin transactions. These are not secured in a blockchain except for the last and first entries. The balance does not become real until it meets the blockchain. Until the payment channel is closed out, the money remains unreal.

Why was it needed?

Imagine you are working on Bitcoin for exchanging currency. Through the normal payment gateway that uses blockchain as a prime core, you can send money and the other party would receive it in couple of hours.

However, you have to pay a heavy transaction fee for the entire process. Needless to say, blockchain are slow, expensive and effort consuming. To solve the non-flexibility issue of blockchains, a system was needed to enable transaction through a quick method. Lightning network is the solution to the entire problem.

But before we get down to the basics, let us know why there was a need for this fast transaction medium. You may presume a blockchain as a copy register. It one consists of numerous pages and each page has several transactions or entries written over it. When a page is filled, it needs to be added to the register before starting to fill out the transactions on the next page. When a page is filled and has to be added to the register, a number of operations have to be carried out in order to ascertain that every party is approving the contents it contains.

In Bitcoin blockchain, this process takes as much as ten minutes for each page. These transactions come at a cost. Yes, there’s a transaction fee for every page.

At a given moment, several types of the transactions are to be recorded on a single page or the block of the blockchain. The systems or computers working in the chain decide which transactions should be included in the present block. The priority is given to the transactions that yield most number of rewards. In other words, transaction with highest transaction fee is recorded first.

In case your transaction is on the higher side, then it will have to wait as more transactions are always present with same or higher number of value. The waiting time can range from few minutes to hours and even days in certain cases. When you pay more in a transaction, your transaction will be completed quickly. While being biased is one issue of the blockchain, speed is another one. Not only the blockchains are expensive, they take a lot of effort, waiting time and money. In an ideal system, the blockchain would facilitate more transactions but it is the opposite of it in reality. The more the transactions, the longer is the waiting time.

Hence to solve this time-consuming paradox, lighting systems are introduced that represents a potential solution to this world-wide problem.

How does it work?

The entire lightning network is basically a decentralized system of networks that use smart functionalities. Its main function is to enable instant payments across different participant’s networks. The method that is used in the functioning of lightning network is dependent on the underlying blockchain technology.

The system creates a secure network of participants using real Bitcoin transactions and its native scripting language. This creates a gateway through which transactions are done at high speed and volume.

To summarize the entire process in a brief description, here are the steps that systems take to enable easy transactions:

1. A multi-signature wallet is set up with predetermined amount of Bitcoin provided by both the parties.

2. The address of the Bitcoin wallet is stored in public blockchain of the Bitcoin. The information saved also includes a smart contract or a balance sheet. This contract is the proof of the amount of Bitcoin deposits and to whom it belongs.

3.Following the previous step, the payment channel is set up in the next set up. Through this channel, the two parties can conduct an infinite number of transactions without having to use the information stored on Bitcoin.

4.The balance sheet is respectively updated but not shared to the blockchain. It is instead kept by both the parties on each side of the transactions.

5.If in case a dispute occurs, the parties can use the contract or the signed balance sheet in order to pay their share from the multi-wig wallet.

The process of working of the lightning network might appear complicated on books. But for the end user or to say a party, this is an easy process with reduced transaction fees.

Working principle

Earlier we described how lightning system works through a multi-signature wallet or a smart contract between the sender and receiver parties. To make the concept clearer, let us justify the working principle behind this efficient and flexible system.

The lightning system is like a secured locker between two parties who deposit equal amount of money in the shared locker. Both of them put their own safety lock on the locker.

When the money is deposited, the action is recorded on the blockchain. This is done in form of an opening transaction. This is the official opening of a payment channel between both the parties.

The idea behind locking the locker by both the party resides in the fact that no single party can use the money without the consent of the other. The money in the box is utilized to transact between the parties in a quicker way.

Imagine ‘a’ and ‘b’ share 10 Bitcoins in the locker. If ‘a’ wishes to send 2 Bitcoins to ‘b’ , how would that be done?

To do this, ‘a’ will have to promise his ownership for 2 Bitcoins in the common locker towards ‘b’. When this promise of transfer is completed, if the box is unlocked, ‘a’ will take 8 Bitcoins and ‘b’ will take 12 Bitcoins. When summing up the amount, you will realize that ‘a’ has sent 2 Bitcoins to ‘b’ as ‘b’s money increased from 10 to 12 Bitcoins and ‘a’s money is decreased from 10 to 8 Bitcoins. The process shows transfers of 2 Bitcoins from ‘a’ to ‘b’.

While opening the box is one option, keeping it close opens up a multitude of easy transactions. The locker will remain closed if the parties wish to do further transactions. If on the next transactions, ‘b’ wishes to send 3 Bitcoins to ‘a’, then after opening the box, ‘a’ will get 11 Bitcoins and ‘b’ will get 9 Bitcoins.

The payment channel in the lightning networks is a pooling where an amount of money is shared and then transferred through the ownership promises when agreed upon. The locker or in terms of the lightning system, the payment channel can be closed whenever the parties want. The closing channel will give the money to each party. The opening and amount gone to both each party is recorded on the blockchain.

In the example stated above, there were only two parties involved. However, with lightning network, there can be a number of parties involved forming a network of transactions. With a huge payment gateway network, a huge number of transactions can be off loaded from the blockchain. This frees up the bandwidth of the blockchain allowing for more speed and accuracy.

With lightning network, millions of transactions can be performed in a single day without the hassle of a heavy transaction fee.

Other scalability solutions and how lightning network syncs with it?

Though lightning network provides a feasible method of reducing transaction fee and time by interacting with the main blockchains, there are certain other scalability solutions derived in this context. Bitcoins’s Segwit offers a methodological change in the blockchain by taking out the signature from the block and adding it to another separate block. This signature is the private key of the user and act as an essential part of the transaction. By taking it out by Bitcoin’s Segwit software, space can be freed which might result in a huge increase in transaction speed.

Increased the size of the block is another scalability method that can be used efficiently. It is similar to increasing the ram or hard disk memory of your computer. There has been a proposal to increase the block size from 1mb to 2 mb. Though simple as it looks, the process requires a hard fork of the Bitcoin blockchain. There were other extensions like Bitcoin XT and Bitcoin Classic that proposed the increase in transactions by increasing the block sizes.

Bitcoin Unlimited is another important scalable option that demands noticing attention. The system is supported by mining pools like AntPool, investor Roger Ver and ViaBTC. The concept of these option states that the block size is not hard-coded but nodes and miners’ flag assist in the size they want through an idea called ‘emergent consensus.’ Some people argue that ideally, miners should be the deciding factor for the scaling solution as they decide which hardware secure the network.

Final Words

The described above solutions might solve the purpose to some extent, but they don’t provide the speed and accuracy of the lightning network. The scaling issue that has been haunting Bitcoin seems to stop now. In the last few years’ development, the price of Bitcoin has dropped as compared to its fork Bitcoin Cash. The later has removed SegWit and increased block size to as much as 8 MB for easier and quicker transactions.

Contenders of Bitcoin are also working on the scalability solutions with equal force and technology. We know that the ability to be more flexible will determine the best cryptocurrency in coming years. With lightning network on its side, Bitcoin has surely left a huge mark on the list. Yet, the advancements in the systems have to make it safe, better and consistent.