DEFINITION of Lightning Network
Lightning Network is a second layer technology for bitcoin that uses micropayment channels to extend the capacity of its blockchain to transact.
By removing transactions from the main blockchain, the Lightning network should decongest bitcoin and reduce the associated transaction costs. Transactions on the Lightning network are instant and will greatly improve the usefulness of bitcoin as a medium for everyday use.
Lightning Network can also be used for off-chain transactions involving exchanges between cryptocurrencies. For example, it is necessary for atomic exchanges, which will allow one cryptocurrency to be exchanged for another without the intervention of an intermediary, such as cryptocurrency exchanges.
DISTRIBUTION Lightning Network
Lightning Network was first proposed by Joseph Poon and Thaddeus Dryja in 2020 and is currently under development.
To reach its potential of becoming a medium for daily transactions, bitcoin will need to process millions of transactions per day. But the nature of its decentralized technology, which requires the consensus of all the nodes of its network, poses a problem.
For example, approving and storing transactions will be expensive and time consuming if the number on the Bitcoin network increases. An increase in the number of transactions also requires orders of magnitude to improve the processing power of computers, whether located at home or at work, which are necessary to execute transactions involving bitcoins.
Lightning Network solves the scaling problem by creating a second layer on Bitcoin’s main blockchain. This second layer consists of several payment channels between the parties or the users of Bitcoin. A Lightning network channel is a transaction mechanism between two parties. By using channels, the parties can make or receive payments from each other. (See more: Lightning Network: can it fix Bitcoin scaling problem?)
But they are treated differently from standard transactions made on the Bitcoin blockchain. They are only updated on the main blockchain when two parties open and close a channel.
Between these two acts, the parties can endlessly transfer funds between themselves without informing the main blockchain of their activities. This approach dramatically accelerates the speed of a transaction since not all transactions need to be approved by all nodes in a blockchain.
The individual payment channels between the different parties combine to form a network of lightning nodes that can route transactions between them. The resulting interconnections between the different payment channels are the Lightning network.
How does Lightning Network work?
Like the blockchain, the Lightning network disintermediates central institutions, such as banks, which are responsible for routing transactions today.
Here is a practical example of how a Lightning network transaction works.
Alice opens a chain with her favorite coffee and deposits $ 100 worth of bitcoin there. Her transactions with coffee are instant because she has a direct channel with him.
Bob, who has an open chain with the grocery store he visits most often, also buys coffee in Alice’s store. The connection between Alice, the cafe, and Bob guarantees that Alice can use the funds from her balance with the cafe to buy groceries from Bob’s store. Likewise, Bob can use the balance from his grocery store to carry out transactions with companies in Alice’s network.
If Bob closes her channel with the grocery store (and there are no other customers in common between the cafe and the grocery store), Alice will have to open another channel with the grocery store to make purchases there. In this way, a transaction network is created and routed between several Lightning nodes in a decentralized manner.
On the technical side, the Lightning network uses smart contracts and multisignature scripts to implement its vision. (See also: Understanding smart contracts.)
An initial transaction, called a financing transaction, is created when one or both parties finance a channel. In a typical multisignature environment, two main keys (one public and one private) are initially exchanged. The exchange facilitates access to and the expenditure of funds.
In the case of a lightning knot, however, signatures are not exchanged. This is done to prevent the expenses of financing operations from being recognized by the main blockchain. Instead, the two parties exchange a single key which is used to validate spending transactions (also called commitment transactions) between them.
Both parties can perform endless engagement transactions between themselves and other nodes on a Lightning network. They exchange their master keys only when the channel between them is closed.
Are there any fees for using Lightning Network?
Yes, there is a charge for using Lightning Network. They are a combination of routing fees to route payment information between Lightning nodes and bitcoin transaction fees to open and close channels.
At the time of this writing, the interconnection charges are set to zero because there are very few lightning nodes in the system. In the future, they are expected to increase, but not substantially. If the fees associated with the Lightning network become too expensive, Bitcoin users still have the option of moving their transactions to the underlying blockchain.
What are some issues in Lightning Network?
Lightning Network is a relatively nascent technology and is still under development. As such, several problems associated with it are still being resolved. Here are a few.
The most obvious problem with lightning networks, which are supposed to be decentralized, is that they could lead to a replication of the star model, which characterizes today’s financial systems. In the current model, banks and financial institutions are the main intermediaries through which all transactions take place.
Due to more open connections with others, Lightning nodes for large businesses can become similar hubs or centralized nodes in the network. A failure on one of these hubs could easily block a large part (or all) of the network.
The second problem that is studied in lightning networks is the possibility of an increase in bitcoin transaction costs. They constitute an important element of the overall tariffs of the network. If bitcoin transaction costs increase, a second layer could become redundant as it would be cheaper to transact on the bitcoin blockchain.
Lightning networks are also considered vulnerable to hacking and theft, as they must be online at all times. As such, cold storage of parts is not possible. (See more: Bitcoin’s Lightning Network: Three Possible Problems.)