What is the Bitcoin (BTC) Lightning Network (LN)?

The Lightning Network (LN) is a new technology that will allow for instant and micro bitcoin transactions.

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The Lightning Network (LN) is an improvement to the current Bitcoin protocol to allow for smaller, instant and cheaper transactions. It is being developed by Blockstream, MIT and Lightning Labs amongst others.

If you’re holding Bitcoin (BTC), the LN will make your bitcoins as easy to use as your credit card with all the benefits of a decentralized digital network.

The improvement is much needed (and awaited) as the recent burst in popularity revealed an important flaw: the network cannot handle a lot of transactions.

This led to the famous Bitcoin Scaling Debate and even to a new alternative currency called Bitcoin Cash (BCH).

Bitcoin’s scaling problems

The single major flaw in the Bitcoin network is its inability to process many transactions. At the time of this writing, Bitcoin can process just under seven (7) transactions per second (tx/s) while VISA can do about 50,000.

As a global virtual currency, the current throughput is not only low but transacting can be expensive and slow. This takes away a lot of the early promises of Bitcoin.

Needless to say, the people behind Bitcoin are very intelligent and they’re already working on a solution, the Lightning Network (LN).

Lightning Network (LN): Bitcoin’s solution

To solve the issue of scalability on the Bitcoin network, a second layer payment protocol; the Lightning network was developed in 2017 and is currently in beta testing.

The Bitcoin Lightning Network allows for the almost instant transfer of micro-payments through addresses with almost negligible fees. The Bitcoin LN for some time seemed to be the answer to:

  • Scalability: the Lightning Network is capable of performing millions to billions of transactions per second;
  • Low Cost: Utilizing the Lightning Network, users are now able to pay exponentially low fees while performing instant micropayment;
  • Instant Payments: Transaction times when using the Lightning network measure as small as milliseconds to seconds;
  • Cross Blockchain Transaction: Lightning network also integrates instantaneous transfer of funds between different blockchains without the need for 3rd party custodians; Cross-chain transactions popularly referred to as atomic swaps are also possible.

The lightning network performs almost instant blockchain payments with top-notch security backed by smart contracts. The use of smart contracts in Bitcoin is rather new and its application is quite different from that of the Ethereum (ETH) network.

How does the Bitcoin Lightning Network (LN) work?

In layman’s terms, there will be a new network of decentralized middlemen between the user and the blockchain. These middlemen will process your transactions instantly and broadcast it at a later time.

The reason this is possible is that the middlemen are theoretically lending Bitcoin in between the time of your initial payment and the on-chain settlement. As a result, said middlemen will earn interest income for their efforts.

In technical terms, Lightning is a decentralized network built with the smart contract functionality to enable virtually instant transfer of funds across a network of connected participants.

The scripting language of the lightning network is the native smart contract which enables the network to create an open network that will enable participants to transact at high speeds and volumes.

The lightning network features a peer-to-peer system, which allows two participants to create an entry ledger on the network to create a path for the movement of funds between both parties, referred to as ‘channels’.

The entry ledger can be closed by either of the participants on the conclusion or breach of the agreement.

A Flaw in the Lightning Network?

While the Lightning Network may have improved the speed of transaction of Bitcoin and popularly flagged as the solution to Bitcoin’s scalability problems, some experts have discovered limitations in the functionality of the Lightning Network (LN).

Diar; a cryptocurrency research firm has reported a fault in the Lightning Network. The report explains that the network doesn’t allow for large transactions and that most transactions fail to complete.

The report shows that the network processes all payments of $0.03 or less, while for payments of about $5.50 or greater, the chances of success drop sharply to one in two.

The Lightning Network developers shrugged off the criticism saying that the network’s capacity is purposely low to prevent significant losses during the beta phase.

The project is only six months young and features most of the oldest and brightest minds in decentralized payment networks. With a successful implementation, the Lightning Network can take the crypto community by surprise.

For more information, whitepaper, developer guides and more, visit the official Lightning Network Reddit page

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