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What Is The Lightning Network?

Last updated 27th Dec 2022
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Bitcoin has changed the way people manage their online transactions by allowing users to control their money without the help of traditional financial institutions. However, when it comes to transaction processing, Bitcoin’s limitations have long been seen as a drawback.

Now, this problem is being addressed with the Bitcoin Lightning Network, which allows users to perform hundreds of thousands of low-cost transactions per second. Here you can read about what is the Lightning Network and how it operates.

What Exactly is the Lightning Network?

As first outlined in the Bitcoin whitepaper, Bitcoin needs to improve functionality before it can be used as a universal medium of exchange and peer-to-peer payment system. Currently, Bitcoin is limited by the following factors:

  • Fees - Because there is only a limited amount of blocks, mining costs can vary widely depending on the demand.

  • Transactions per second - Bitcoin can process a maximum of seven transactions per second (TPS).

  • Network congestion - Slow block timings and increased network usage can cause delays in transaction confirmation.

By offering fast and affordable transactions and throughput of about one million transactions per second, the Bitcoin Lightning Network attempts to overcome the above limitations. However, although any type of transfer can be made using Lightning, most users find it best for micropayments and similar transfers.The Lightning Network consists of multiple payment channels

The Lightning Network is decentralized, permissionless, and open source. It does not introduce a new token and does not grant the same freedoms as Bitcoin. Its security is based on on-chain Bitcoin transactions that use smart contracts to enable instant off-chain settlements.

How Does the Lightning Network Operate?

Smart contracts, which establish off-chain payment channels between two parties, are the foundation of the Lightning Network. Direct payment channels take place above the main blockchain.

But how can you use this technology in your day-to-day life? Well, one potential use case could be to set up a channel with your landlord in order to pay your weekly rent.

You can make as many payments as you want after the payment channels are available. Instant transactions occur at a fraction of the cost of those on the main network. The payment channels include a separate ledger where the main Bitcoin blockchain can track transactions.

The right to terminate or renew is at the discretion of each party.

If both parties decide to close the channel, all transactions that took place will then be consolidated and sent to the main blockchain ledger. Consolidating smaller transactions means that larger payments can be processed faster. Without payment channels, smaller transactions would slow down the Bitcoin network for everyone by blocking the larger transactions.

Of course, you could always use a standard Bitcoin transaction. However, you would then have to pay network fees for each order. This is likely to become more expensive. The only fees you pay with the Lightning Network are for opening and closing the payment channels.

The Bitcoin Lightning Network is capable of processing 1,000,000 transactions per second

Advantages and Disadvantages of the Lightning Network

Without compromising the fundamental security of the basic lightning network protocol, the Lightning Network can dramatically increase scalability, transaction speeds, and transaction rates.

However, although the network offers significant advantages, there are also some drawbacks. We will take a closer look at both below:

Pros

  • Fast

First and foremost, the Lightning Network delivers on its promise to speed up peer-to-peer transactions. Smart contracts control cash distribution via a multi-signature wallet; therefore, there is no need to wait for block confirmations or nodes to confirm the transfer.

  • No more minimum payments

Even the smallest Bitcoin transfers from peer-to-peer become financially sustainable thanks to the Lightning Network. No matter how modest the transaction, it is completed and settled right away.

  • Less fees

One of the biggest benefits of the Lightning Network is that it significantly lowers transaction fees as well. Larger transaction holders will no longer be subject to high processing fees.

  • Transactions are anonymous

The Lightning Network's mini-ledger channels enable fully anonymous and encrypted Bitcoin transactions. All completed and signed-off transactions are added to the Bitcoin blockchain only when the channel is terminated.

Cons

  • No offline support

The Lightning Network's inability to handle offline transactions is arguably its biggest flaw for Bitcoin users. It will only be possible for people to participate with a fast Internet connection.

  • Possible security issues due to over-reliance on peers

One issue with the network is that two participants in a payment channel can take advantage of each other. This typically entails one party closing the channel and taking the money without providing the requested service or resetting the channel to its original state. This leads to fraudulent closure of the channel, which allows the buyer of the products or services to escape without paying anything.

The good news is that there is a window of opportunity to challenge the closure of a channel. However, if a person is absent for a long period of time, this period ends.

  • Less fees more threaten the sustainability of Bitcoin's network

Lower transaction costs can sometimes be seen as a disadvantage for the Bitcoin network. Transaction fees will eventually be the only source of revenue for the miners responsible for maintaining the Bitcoin blockchain once all Bitcoins have been mined. Without these fees, Bitcoin's long-term viability could be in question.

The Future of the Network

The Lightning Network is becoming more widely used, and over $120 million in Bitcoin is already locked in the bitcoin network. In addition, many well-known companies and financial platforms in 2022 have used it. Allowing users of these services to transfer Bitcoin instantly around the globe has also contributed to expanding the market for Bitcoin.

The Lightning Network can also be used in conjunction with the crypto wallet features of various crypto platforms as adoption increases.

Conclusion

The Lightning Network is expanding rapidly. As a result, more and more people, businesses, and nations are using this fast, inexpensive, and secure method for receiving payments.

There is little doubt that the network has helped solve the problems of the mainnet, although it still has some shortcomings. As more and more people realize the benefits of the Lightning Network, we should see an increase in its adoption.

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Emma Dwyer

Emma Dwyer

Emma is a law graduate with seven years of experience working in financial services. She has been writing in the cryptocurrency and blockchain tech space for two years now. Recently she worked as a Managing Editor and Head of Content for different crypto publications.