Understanding the Lightning Network: Where We Stand

The scaling of bitcoin’s network has long been a source of strife among supporters and detractors alike. As the network gained momentum over the last few years, users have seen both the transaction fees and wait times increase significantly.

Other cryptocurrencies have spawned based on this weakness, but bitcoin’s development community is hard at work on the scalability problem. The most promising project at the moment is the Lightning Network.

The Shortcomings of Bitcoin

Bitcoin’s original promise of being able to create a trustless network that enabled immutable financial transactions is still true to this day. With the implementation of SegWit on August 24th, 2017, it was hoped that the issues could be solved by finding a roundabout way to increase the block size. However, the protocol has not been widely adopted, and as such, a new solution is required.

This is where the need for the Lightning Network arose from, and it has been in development since 2015. The simplest way to understand the network is that it helps manage bitcoin transactions without executing them directly on the Bitcoin blockchain.

The Basics of the Technology

The core idea behind the Lightning Network is that you can create small “bidirectional payment channels” that act as a running tab between two accounts. The smart contracts determine how much is owed to who, but none of this is stored directly on the blockchain until a payment is rendered. Basically, it is a running tab system that allows for microtransactions. Allocations are made between parties off-blockchain, with all the confidence of performing commerce on-blockchain.

Multi-signature wallets are the connecting force that acts as a running tab in a safety deposit box for the two parties. Their cryptocurrency sits in the wallet and is debited and credited according to the pre-existing agreement.

The result is that all of the different payment channels connect multi-sig wallets to create a network of two-party ledger entries. This means you don’t need to have a wallet between every duo that wishes to do transfer money. The connections can occur across a network of users with the same effect.

The Benefits of Lightning

The most salient benefit of the Lightning Network are the faster payments at a lower cost. The presence of instant payments will increase the usability of the entire network, and the smart contracts used will still be secure enough to prevent tampering.

As we mentioned before, the Bitcoin network was previously limited by its lack of scalability, so on a meta-level, the lightning network is enabling the network to continue its expansion.

The presence of the Lightning Network will also enable cross blockchain transactions (also known as atomic swaps), even with heterogeneous blockchain consensus rules. The enablement of these instant transactions between blockchains will eliminate the need for third party custodians and change the way the networks interact.

Where We Are Now

In order for Bitcoin to be a viable payment option in the future, something like the lightning network is absolutely essential. Scaling requires the ability for small payments to be made quickly, otherwise it will never be feasible to make everyday purchases like coffee or lunch with bitcoin.

Looking at all the potential benefits listed above, it is clear that the lightning network will have a drastic effect not only on the Bitcoin network, but the entire cryptocurrency ecosystem. As such, the protocol is not only being developed for the Bitcoin network, but many other of the top cryptocurrencies (Litecoin, Stellar, zcash, Ethereum, and Ripple). The test results are starting to come in, however, none of the implementations are ready for launch yet. Lightning Labs has released a beta version, but before this technology can change the industry, a lot more work must be done.

Featured image courtesy of Shutterstock. 

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