Bitcoin Lightning Network

Written by: Lukas Schor of The Argon Group

1) What’s going on here?

The transaction fees on the Bitcoin network have skyrocketed to fresh all-time highs of overheen $30 te the past duo of months, but a fresh scaling solution might save the day for the digital currency te 2018.

Two) What is the Bitcoin Lightning Network?

The Lightning Network is a proposed system built on top of Bitcoin that would let people instantaneously send/receive payments and reduce transaction fees by keeping them off the main network. It helps Bitcoin be more useful spil a day to day currency.

Trio) How does it work?

The Lightning Network is a system of wise contracts built on top of the base Bitcoin blockchain that permits for swift, cheap payments directly inbetween two parties. Ter order to achieve thesis swift and cheap transactions, the following steps are taken:

  • A multi-signature wallet which holds some amount of bitcoin (provided by at least one of both parties) is set up
  • The wallet address is then saved to the public Bitcoin blockchain including a balance sheet (clever contract) that proves how much of this bitcoin deposits belongs to whom
  • After this payment channel is set up once, it is possible for thesis two parties to conduct an unlimited amount of transactions without everzwijn touching the information stored on the blockchain
  • With each transaction, both parties sign an updated balance sheet te order to always reflect how much of the bitcoin stored ter the multi-sig wallet belongs to whom
  • The updated balance sheet is not uploaded to the blockchain but rather both parties keep a copy of it
  • Whenever there is a dispute or the payment channel is closed, both parties can use the most latest mutually signed balance sheet to pay out their share of the multi-sig wallet

This all sounds very cumbersome, but te fact for the end-user hardly any extra effort is needed to conduct Lightning payments, all of the above will toebijten automatically te the background.

The Lightning Network’s use of payment channels effectively permits users to transact with each other directly rather than broadcasting their business to the entire world (aka public blockchain). By tracking their payments inbetween each other on their own, the two parties are able to avoid expensive and time-consuming interactions with the blockchain. If there is some sort of dispute regarding balances on the Lightning Network, the most latest balance sheet provided by either of the two parties will determine how the funds ter the multi-sig wallet are split up.

To better understand how the Lightning Network works, wij recommend watching this brief movie:

Four) Do I need to open fresh payment channels for every fresh party I want to transact with?

No, the Lightning Network is (thus its name), constructed spil a network. Meaning albeit Alice might not yet have an open payment channel with Dave, Alice is indirectly connected with Dave via Bob, or even using numerous steps ter inbetween. With the Lightning Network, users are able to transact with anyone who is connected to their network of payment channels through numerous hops. Te theory, everyone should be connected to everyone else through the network via only few knots. People are also incentivised running thesis connecting knots through (puny) fees that are paid out every time a transaction uses one of their connections. Early results from the testnet implementation of the Lightning Network confirm that a adequately decentralized network indeed can be created.

The architecture of the Lightning network is still trustless (because it is based on wise contracts) and will always make sure that the funds will reach their destination through intermediaries, or kwestie a refund if there is no officieus path to the destination possible.

Bob and Carol function spil “nodes” on the network. Knots on the Lightning Network are ter some ways analogous to miners on the Bitcoin network. They function spil the servers that process the transactions on the network ter a decentralized manner. Like miners, they do not have control overheen the funds they help budge. Bob cannot steal Alice’s funds, spil he will only receive the sender’s incoming payment if he has already sent the outgoing payment to the recipient.

Five) Benefits

  • Lil’ payments are possible: Since fees are proportional to the payment amount, you can pay a fraction of a cent, accounting is even done ter thousandths of a satoshi.
  • Payments are lodged instantly: The money is sent ter the time it takes to cross the network to your destination and back, typically a fraction of a 2nd.
  • Improved privacy: Not every transaction is stored on the public blockchain, only once when the payment chanel is eventually closed and the balance is paid out to both parties

6) Shortcomings

  • Peer failures: If one of the peers is unresponsive, users might have to wait for hours to close a payment channel and resend the funds via an alternative route
  • No Offline Payments: Users can’t pay someone who is not online
  • Not ideal for large payments: Even tho’ a route via various payment channels might exist, the funds te the peers multi-sig wallets might not be sufficient to transfer large funds
  • Centralization: The Lightning Network might encourages centralization te payment hubs (similar to miner centralization)

7) When will Lightning Network be launched?

Presently, there is a Proof-of-Concept implementation running on the Bitcoin Testnet and even an experimental implementation on the Bitcoin Mainnet. So everybody can attempt out the Lightning Network and even set up their own Lightning Knot already today. A date when the Lightning Network will be widely launched on the Bitcoin Mainnet with integrations into the major wallets is not yet set, but chances are high it will be sometime this year.

Update March 16th: Lightning Labs just announced a fresh mainnet release of their implementation of the Lightning Network.

What do you think?

Will Lightning Network restore Bitcoins functionality of being a swift and efficient medium of exchange? When will wij see a utter implementation of Lightning Network on the Bitcoin mainnet? What other second-layer scaling solutions are you looking forward to? Let us know te the comments below!

Related movie: Five Reasons Why You Should Invest Ter Bitcoin Dubai UAE

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