Bitcoin is still one of the most convenient cryptocurrencies. Although it has its drawbacks, programmers have been dealt with them. This article talks about the Lightning Network tool, which speeds up cryptocurrency transactions. This is a special network of lightning payment channels that allow you to conduct transactions faster during periods of the high demand of the Bitcoin Network.
The Lightning Network gives users the ability to transfer Bitcoin quickly and without charges. This way, you can avoid the two most important disadvantages of the cryptocurrency – the delay in the transfer of coins and transaction fees. Technically speaking, this becomes possible due to the fact that the additional network is built on top of the Blockchain network. It provides direct or indirect channels for transferring currency between users.
Do you want to know more about how the Lightning Network works? Read on to find out:
- Need for the Lightning Network
- What is a Lightning transaction
- How a funds transfer works
- Securing transactions in Lightning
- FAQ Section
Bitcoin Network Problems
Bitcoin gives many privileges to users. It is a network with worldwide coverage and free currency circulation without government or central bank restrictions. However, there is a downside.
The increased demand for Bitcoin overloads the network. That leads to slow transactions and gives miners a chance to take increased fees. The delay in the transfer is especially inconvenient in everyday payments when you pay for pizza or decide to stop by a coffee shop. You won’t wait 10-15 minutes for a cake!
Surely you have already faced this problem if you made transactions during a busy period when there are a lot of users on the network. At this time, payment channels are overloaded, so Bitcoin transactions become very delayed and significantly expensive. As you know, every Bitcoin transfer is sent to the central nodes for confirmation. With heavy traffic, miners confirm the transactions once every ten minutes. If you have not paid a sufficient fee, the waiting time for the currency transfer may last up to several days. Of course, this does not satisfy Bitcoin users who are used to the high speed of crypto exchange.
Technically, the problem with slow crypto transactions is that Bitcoin, unlike fiat currency, is not scalable. Just imagine that Visa can process about 9,000 times more transfers per second than the Bitcoin Network! Sometimes cryptocurrencies reach more than 10 transactions per second, but this gap in numbers is still huge.
The lightning Network system applies not only to large transfers but also to everyday small cryptocurrency transactions. Slowness and high transaction fees are serious obstacles to the development of Bitcoin as a coin for regular exchange.
Maybe Сhange the Сryptocurrency…
It would seem that you can simply abandon Bitcoin in favor of other cryptocurrencies. However, altcoins have not yet confirmed their stable position in the situation with the discussed shortcomings, and here’s why:
- Some altcoins are still impossible to verify, so you may be given a fake (“shitcoin”) instead of a real currency.
- Bitcoin is the most widely distributed, so it will be easier for you to find other users to exchange
- At the same time, it is not known what will happen to the transfer speed of Ethereum or Ripple, if they achieve the same popularity as Bitcoin.
All these conditions hitherto make Bitcoin the most preferred, especially accounting for the Lightning Network to solve problems with main nodes.
What is the Bitcoin Lightning Network?
The Lightning Network is a network for fast (“lightning”) cryptocurrency exchanges between Bitcoin Network users. Everyone can connect to this system and conduct transactions via an allocated payment channel, which is a smart contract inside the common Blockchain.
Within the Lightning Network Bitcoin is replaced by a debt receipt, which is then implemented on the scale of the entire Blockchain. You do not have to transfer the currency every time. Instead, you write down a receipt that is much faster and for free. If the Bitcoin Network is the first-order network, the Lightning Network protocol is located on the second level. Since the Lightning Network and Bitcoin one have the same cryptographic hash function, they are compatible in currency transfer.
Due to this superstructure, the transaction speed increases: people are not forced to access other nodes every time. The participants themselves act as nodes. An important factor is that there are no transaction fees in the Lightning Network. Each smart contract exists almost independently of the center (excluding deposits, see below). All this makes it possible for users to make unlimited transactions between two parties or a third party’s involvement. This system was mainly developed for instant micropayments, such as visiting a coffee shop or a clothing store.
The Lighting Network is the product of two young programmers, Joseph Poon and Thaddeus Dryja. The developers created the network back in 2015, thus solving the two main problems of Bitcoin transmission. Thanks to these guys, the blockchain has become much more accessible, making the Bitcoin community more user-friendly. At the heart of this concept are lightning channels, which allow you to make direct transactions without intermediaries. Well, let’s take a look at how it works!
How do Lightning Payment Channels work?
The core of the Lightning Network is payment channels. If two parties want to send funds between each other, they create a channel on the Bitcoin Blockchain. Due to the fact that it is a direct channel that avoids interaction with the main Blockchain center, no transactions between other users slow down the transfer. So you do not need to make any fees to speed up this process. This chain is always open and accessible.
If two users have at least one channel open on the Blockchain, they can send and receive payments within the Lightning Network protocol. Lightning payments are the shortest route for your funds on the Bitcoin Blockchain, as they connect users directly. Since lightning transactions are mainly used for everyday and household purposes, their technical basis is also called micropayment channels.
When the time comes to complete the currency exchange between users, they close the channel. Users make the final operation and no one else can use the channel for a funding transaction. The closure also takes place inside the Bitcoin Blockchain. Thus, you control the process yourself and make a series of own implementations almost independently of the Blockchain center.
Security of Lightning Payments
In the Lightning Network, users make transactions according to their own records that they keep during the collaboration. When the business is nearing its end, they calculate the losses and gains and make one transaction based on these calculations. It is good if you are making an exchange with a friend whom you can trust. But what will ensure your payments if your counterpart is a stranger?
For secure currency exchange within the Lightning Network, a deposit is provided. Each user makes it before the transaction begins. The total amount of the deposit for both parties must be at least the amount for which the business is done. The deposit can be equal to the lightning transaction, it depends on the user agreements.
Example of a Deposit
Suppose the lightning transaction amount is 10 Bitcoins. Each participant pays five Bitcoins as a deposit. These funds are sent to the main Blockchain to a multi-signature Bitcoin address. Then miners register them as the first-level transactions. The main node confirms it, and then all exchanges take place inside the Lightning Network using the Lightning Node.
If something goes wrong, one of the participants can withdraw their deposit and go out from the business. They may not even warn the other party since these funds are at their complete disposal. Each participant can only take their own currency. For example, if one user owes another one Bitcoin, they can only withdraw 4 of the deposited funds. If they try to transfer all 5 Bitcoins to themselves, the system will automatically send the entire deposit (10 Bitcoins) to the other party. This is how Lightning protects people from fraud.
Thus, users are able to make more transactions without having to contact the miners every time. This allows you to exchange currency faster along the chain and avoid paying fees for small transfers. The lack of constant access to third parties such as the center does not overload the main protocol.
This trick is called cross-chain atomic swaps when participants operate with currency without contacting third-party nodes. As we can see, a node is present in the Lightning Network, but only once. In this way, the Lightning Network differs from transactions on the first level of the Blockchain, when you need to access the central nodes of the system every time.
Atomic swaps are so-called because the deposit of each party is atomized from the other party, that is, it is not available for withdrawal. As in the main Blockchain, this network uses private keys along with public keys. So, this technology protects both participants when using the Lightning Network.
Are there any apps for the Lightning Network?
For convenient use of the network, there is an app Lightning Labs. It was originally designed by a company of the same name, which is the official representative of the network. Using the lightning network, you can install this crypto wallet for convenient currency exchange without accessing Bitcoin’s blockchain for each lightning operation.
In April 2019, the first version of the Lightning app was released. At the same time, it continues to be developed to the final state in order to get a test in the wide cryptocurrency community. You can also use Bitcoin wallets from other manufacturers, such as BlueWallet, Sats app, Breez, and others. Most of them work on Android and iOS.
How to pay for the Lightning Network?
To make a lightning payment, install a suitable Bitcoin wallet. Then transfer the Bitcoin to this wallet using an IP address or a QR code. Open the lightning channel and make the necessary confirmations. In the “Transactions History” section of the app, scan the code and transfer the amount. Done!
How Many Transactions can Lightning Network handle?
You can make as many businesses as you want on the Lightning Network. However, keep in mind that the history of operations will save only two of them, namely the opening of the channel and get off-chain. All other operations are not recorded as lightning and are not registered in the Blockchain center.
Can I Invest in the Lightning Network?
Since the vast majority of crypto protocols have not yet adopted Lightning, it is hardly possible to earn large amounts here. You can try to make money on transaction fees. However, since they are extremely small, you can only practice. In its current state, Lightning app facilitates currency transfers, but it is unlikely to bring you real money.
However, some experts are quite confident in the potential of the Lightning Network. In February 2019, the head of Twitter and the payment service Square, Jack Dorsey, argued that the integration of the Lightning Network into one of the most popular payment applications, Cash App, is only a matter of time. So it is quite possible that most of us will use lightning payments in the coffee shop as simple as real money.
What’s the Difference Between Bitcoin and Ripple?
Ripple protocol does not have the same degree of decentralization as Bitcoin since more than half of the coins are owned by its developers. The main activity of Ripple is cooperation with large companies, while Bitcoin was originally aimed at a wide audience. Ripple does not have a blockchain, it is only an open-source token for interaction with banks and other corporations. Therefore, Ripple cannot be considered an authentic cryptocurrency. These are the differences between the two leaders of the crypto market in a nutshell.