What İs Lightning Network And How Does İt Work?

As a concept, the Lightning Network (LN) was created in 2015 by Joseph Poon and Thaddeus Dryja.

What is Lightning Network?

The main idea behind the project was to design a payment protocol that could be used as an out-of-chain solution to the scalability problem Bitcoin faced, but the Lightning Network could apply to other crypto currencies.

The Lightning Network emerged after restrictions not only on Bitcoin but also on many other crypto currencies. Currently, Bitcoin Blockchain can process only 2 to 7 transactions per second (TPS). As the crypto currency ecosystem grows and more people join the network, the number of transactions in Blockchain increases. As the network becomes more and more intense, overall performance decreases, greatly reducing the practical use of Bitcoin as a global digital currency. In such a context, the Lightning Network was created as an attempt to reduce the network density of Bitcoin Blockchain.

How Lightning Network Works

The Lightning Network consists of an off-chain transfer network built on the Bitcoin Blockchain. The system operates at a peer-to-peer (P2P) level and its availability is based on the creation of bidirectional payment channels where users can make smooth crypto currency transactions.

After the parties decide to open a payment channel, they can transfer money between their wallets. Although the process of establishing a new payment channel requires a chain transaction, all transactions within the channel are out of chain and do not require global consensus. Therefore, these transactions can be carried out quickly with an intelligent contract with much lower fees and much higher TPS rates.

To open a payment channel, the two parties involved in the network must install a multi-sig wallet and add some money to it. Funds stored in multi-sig wallets can be accessed only if both parties have private keys (two or more, depending on the situation). This means that one party cannot open the wallet without the other's permission.

For example, suppose Ali wants to use Lightning Network to trade Bitcoin with James. First, they will create a payment channel using their multi-sig wallet. The payment channel acts as a smart contract, while the multi-sig wallet acts as the depository of the funds to be traded. Throughout the life of the payment channel, Ali and James can make as many off-the-chain transactions as they want.

Immediately after each transaction, both Ali and James sign and update their own balance sheet copy, which records the amount of tokens they have. When finished, they can close the payment channel and publish the final balance sheet on the Bitcoin Blockchain. The Lightning Network smart contract will allow them to purchase Bitcoins according to the latest version of the balance sheet.

In summary, the parties only need to interact with Bitcoin Blockchain twice. Once the payment channel is switched on and off, all other operations in the channel are performed directly without any connection to the main chain.

Network Routing

Even if the two parties do not have a direct payment channel, they can still send and receive Bitcoin through interconnected payment channels. This means that as long as there is a network path with sufficient balance between them, Ali can send money to the Parent without having to create a direct channel with him.

So, if Ali has an open payment channel with James and James has a channel with Parent, he can make the payment through Ali. Payment routing can include many Lightning Network nodes, but the smart contract will automatically look for the shortest path.

Advantages of Lightning Network

The Lightning Network project works for an out-of-chain solution to the problem of scalability. If successful, Bitcoin can reduce the density of the Blockchain.

By using two-way payment channels, the Lightning Network makes transactions almost instantaneous.

The Lightning Network may be suitable for micro payments because it allows the transfer of small values. Moreover, in the M2M (Machine-to-Machine) economy, where electronic transactions are carried out without the need for human intervention, automated micro payments can be applied.

Limitations of Lightning Network

Unlike in-chain transactions, Lightning Network payments cannot be made if the recipient is offline.

Network participants may need to regularly monitor payment channels to secure their funds (such risks can be overcome by outsourced monitoring services).

The Lightning Network is not yet eligible for large payments. If the network is counted with a large number of multi-sig wallets (basically shared wallets), it is likely that they have sufficient balance to act as intermediaries for large payments.

Turning a payment channel on and off usually involves manual and chained transactions that require higher transaction fees.

When is Lightning Network Available?

On March 15, 2018, Lightning Labs announced the 4th largest version of the Lightning Network Daemon, the first beta release of Lightning home networking. This version is a full implementation of the Lightning Network node and is currently being tested on the Bitcoin Test Network. Along with Lnd, other applications such as c-lightning and eclair are being developed.

Note, however, that there is no official launch date for the Lightning Network as each protocol implementation has a different approach based on regular updates and continuous improvement.

Since the beta release of Lnd, there has been a huge increase in the number of Lightning Network nodes and payment channels. As of January 2019, the Grafana dashboard reports more than 24,300 payment channels.

The collaboration of nodes and payment channels makes the Lightning Network interesting to solve the scalability problem. The beta version has undergone many tests and its effectiveness has not yet been proven. However, Lightning Network has great potential to improve Bitcoin and crypto currency ecosystems.

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