15 June 2020
The popularity of cryptocurrencies has grown exponentially over the past few
Scalability is one of the biggest problems for blockchain networks. Currently, for example, Bitcoin, a top and widely used digital coin, can process, on average, seven transactions per second. Visa, on the other hand, averages roughly 24,000. To solve the cryptocurrencies scaling problem Lightning Network came into play.
It aims to increase the rate of transactions per second and lower transaction fees in the process. In this article, we will explore everything you need to know about Lighting Network.
What is Lightning Network?
Lightning Network is a two-way payment channel that allows users to conduct transactions off the blockchain. The network is a second layer of the application built separately from the blockchain but interacts with the blockchain. It allows direct transactions between users without the need for confirmation. It can increase transaction speeds, helping lower transactional costs considerably.
Who Created Lightning Network?
The Lightning Network was first conceptualized by Joseph Poon and Tadge Dryja in 2015, as outlined in the Lightning Network whitepaper. The network was to help scale up Bitcoin. Since then, it has become one of the critical layer-2 innovations in the crypto ecosystem.
How to Use the Lightning Network
To better understand how to use the Lightning Network, we shall use an example. In this case, we have Tom and Jane, two individuals looking to send money to each other quickly and with lower fees.
For fast and pocket-friendly transactions, they will have to set up a channel on the Lightning Network. The first step is to create a multi-signature wallet, a wallet they can both access with their respective private keys. It’s more like a joint bank account.
Once they have the wallet, they will both have to deposit a certain amount of Bitcoins into the wallet. Let’s say 4BTC each. From then on, they can perform unlimited transactions with each other. The transactions are simply a redistribution of the funds in the shared wallet.
For example, if Tom wants to send Jane 1BTC, he will have to transfer the ownership right of that amount to her. The two will have to use their private keys to sign up for an updated balance sheet.
The real redistribution happens when the channels are closed. This is when the result balance is registered on the blockchain. For our example, after the channel is closed, Tom will have 3BTC, and Jane will receive 5BTC.
Only after a channel is closed is the information about the initial and final balance broadcasted on the main blockchain.
Advantages of the Lightning Network
- Fast transactions: with the Lightning Network in play, users won’t have to wait minutes for transactions to take place. Transactions speed can be significantly reduced. They will be almost instantaneous. This is, no matter how busy the network might be.
- Lower transaction fees: as transactions will take place off the main blockchain. Users will only pay the tiniest of fees. The fees paid for lightning transactions will be significantly lower, boosting digital coins’ mass adoption.
- Scalability: currently, cryptocurrencies are having a hard time competing with conventional transactional services like Visa. The Lightning Network is pegged to improve cryptocurrencies transactions per second, boosting scalability considerably.
- Atomic Swaps: the Lightning Network will allow users to send funds from one chain to another without using intermediaries like exchanges. This is as long as the blockchains share the same cryptographic hash function.
- High security and anonymity: as transactions will be taking place off the main blockchain, anonymity becomes possible. The micro-transactions will be almost hard to trace. With the Lightning Network, security also gets an upgrade, with payments getting utmost security.
Disadvantages of the Lightning Network
- Participants need to be online: normal cryptocurrency transactions don’t need users to be online. However, with the Lightning Network, users have to be online to conduct transactions. Without internet access, utilizing the Lightning Network will be hard.
- Private keys will be vulnerable: as Lightning Networks have to occur online, users have to store their private keys online. It is no secret that hot wallets are not the safest option for storing private keys. They are vulnerable to online attacks.
The Lightning Network might just be the secret weapon cryptocurrencies need to gain mainstream adoption. The network may go down as one of the most significant innovations in the crypto ecosystem. As it comes into play, it will definitely usher cryptocurrencies and blockchain into a new era.